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interfluidity » Trade-offs between inequality, productivity, and employment

Trade-offs between inequality, productivity, and employment

I think there is a tradeoff between inequality and full employment that becomes exacerbated as technological productivity improves. This is driven by the fact that the marginal benefit humans gain from current consumption declines much more rapidly than the benefit we get from retaining claims against an uncertain future.

Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite. If you are very wealthy, there is real value in purchasing yet another apartment in yet another country through yet another hopefully-but-not-certainly-trustworthy native intermediary. There is value in squirreling funds away in yet another undocumented account, and not just from avoiding taxes. Revolutions, expropriations, pogroms, these things do happen. These are real risks. Even putting aside such dramatic events, the greater the level of consumption to which you have grown accustomed, the greater the threat of reversion to the mean, unless you plan and squirrel very carefully. Extreme levels of consumption are either the tip of an iceberg or a transient condition. Most of what it means to be wealthy is having insured yourself well.

An important but sad reason why our requirement for wealth-as-insurance is insatiable is because insurance is often a zero-sum game. Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. On such a boat, a passenger’s material needs might easily be satisfied — how many fancy meals and full-body spa massages can one endure in a day? But despite that, one could never be “rich enough”. Even if one’s wealth is millions of times more than would be required to satisfy every material whim for a lifetime of cruising, when the iceberg cometh, you must either be in a top wealth quantile or die a cold, salty death. The marginal consumption value of passenger wealth declines rapidly, but the marginal insurance value of an extra dollar remains high, because it represents a material advantage in a fierce zero-sum competition. It is not enough to be wealthy, you must be much wealthier than most of your shipmates in order to rest easy. Some individuals may achieve a safe lead, but, in aggregate, demand for wealth will remain high even if every passenger is so rich their consumption desires are fully sated forever.

Our lives are much more like this cruise ship than most of us care to admit. No, we don’t face the risk of drowning in the North Atlantic. But our habits and expectations are constantly under threat because the prerequisites to satisfying them may at any time become rationed by price. Just living in America you (or at least I) feel this palpably. So many of us are fighting for the right to live the kind of life we always thought was “normal”. When there is a drought, the ability to eat what you want becomes rationed by price. If there is drought so terrible that there simply isn’t enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets.

If insurance were not so valuable, it would be perfectly possible to have very high levels of inequality and have full employment. The very rich might employ endless varieties of servants to cater to their tiniest whims. They’d get little value from the marginal new employee, but the money they’d lose by paying a salary would have very little value to them, so the new hire could be a good deal. But because of the not-so-diminishing insurance value of wealth, the value of hiring someone to scratch yet another trivial itch eventually declines below the insurance value of holding property or claims. There is a limit to how many people a rich person will employ, directly or indirectly.

In “middle class” societies, wealth is widely distributed and most peoples’ consumption desires are not nearly sated. We constantly trade-off a potential loss of insurance against a gain from consumption, and consumption often wins because we have important, unsatisfied wants. So we employ one another to provide the goods and services we wish to consume. This leads to “full employment” — however many we are, we find ways to please our peers, for which they pay us. They in turn please us for pay. There is a circular flow of claims, accompanied by real activity we call “production”.

In economically polarized societies, this dynamic breaks down. The very wealthy don’t employ everybody, because the marginal consumption value of a new hire falls below the insurance value of retaining wealth. The very poor consume, but only the most basic goods. In low productivity, highly polarized economies, we observe high-flying elites surrounded by populations improvising a subsistence. The wealthy retain their station by corruption, coercion, and extraction while the poor employ themselves and one another in order to satisfy these depredations and still survive. Unemployment is not a problem, exactly, but poverty is. (To be “unemployed” in such a society means not to be idle, but to be laboring for an improvised subsistence rather than working for pay in the service of the elite.)

Idle unemployment is a problem in societies that are highly productive but very unequal. Here basic goods (food, clothing) can be produced efficiently by the wealthy via capital-intensive production processes. The poor do not employ one another, because the necessities they require are produced and sold so cheaply by the rich. The rich are glad to sell to the poor, as long as the poor can come up with property or debt claims or other forms of insurance to offer as payment. [1] The rich produce and “get richer”, but often they don’t much feel richer. They feel like they are running in place, competing desperately to provide all the world’s goods and services in order to match their neighbors’ hoard of financial claims. However many claims they collectively earn, individually they remain locked in a zero-sum competition among peers that leaves most of them forever insecure.

It is the interaction of productivity and inequality that makes societies vulnerable to idle unemployment. The poor in technologically primitive societies hustle to live. In relatively equal, technologically advanced societies, people create plenty of demand for one another’s services. But when productivity and inequality are combined, we get a highly productive elite that cannot provide adequate employment, and a mass of people who preserve more value by remaining idle and cutting consumption than by attempting low-productivity work. (See “rentism” in Peter Frase’s amazing Four Futures.)

One explanation for our recent traumas is that “advanced economies” have cycled from middle-class to polarized societies. We had a kind of Wile E. Coyote moment in 2008, when, collectively, we could no longer deny that much of the debt the “middle class” was generating to fund purchases was, um, iffy. So long as the middle class could borrow, the “masses” could simultaneously pay high-productivity insiders for efficiently produced core goods and pay one another for yoga classes. If you didn’t look at incomes or balance sheets, but only at consumption, we appeared to have a growing middle class economy.

But then it became impossible for ordinary people to fund their consumption by issuing debt, and it became necessary for people to actually pay down debt. The remaining income of the erstwhile middle class was increasingly devoted to efficiently produced basic goods and away from the marginal, lower productivity services that enable full employment. This consumption shift has the effect of increasing inequality, so the dynamic feeds on itself.

We end up in a peculiar situation. There remains technological abundance: “we” are not in any real sense poorer. But, as Izabella Kaminska wonderfully points out, in a zero-sum contest for relative advantage among producers, abundance becomes a threat when it can no longer be sold for high quality claims. Any alternative basis of distribution would undermine the relationship between previously amassed financial claims and useful wealth, and thereby threaten the pecking order over which wealthier people devote their lives to stressing and striving. From the perspective of those near the top of the pecking order, it is better and it is fairer that potential abundance be withheld than that old claims be destroyed or devalued. Even schemes that preserve the wealth ordering (like Steve Keen’s “modern jubilee“) are unfair, because they would collapse the relative distance between competitors and devalue the insurance embedded in some people’s lead over others.

The zero-sum, positional nature of wealth-as-insurance is one of many reasons why there is no such thing as a “Pareto improvement”. Macroeconomic interventions that would increase real output while condensing wealth dispersion undo the hard-won, “hard-earned” insurance advantage of the wealthy. As polities, we have to trade-off extra consumption by the poor against a loss of insurance for the rich. There are costs and benefits, winners and losers. We face trade-offs between unequal distribution and full employment. If we want to maximize total output, we have to compress the wealth distribution. If inequality continues to grow (and we don’t reinvent some means of fudging unpayable claims), both real output and employment will continue to fall as the poor can serve one another only inefficiently, and the rich won’t deploy their capital to efficiently produce for nothing.

Distribution is the core of the problem we face. I’m tired of arguments about tools. Both monetary and fiscal policy can be used in ways that magnify or diminish existing dispersions of wealth. On the fiscal side, income tax rate reductions tend to magnify wealth and income dispersion while transfers or broadly targeted expenditures diminish it. On the monetary side, inflationary monetary policy diminishes dispersion by transferring wealth from creditors to debtors, while disinflationary policy has the opposite effect. Interventions that diminish wealth and income dispersion are the ones that contribute most directly to employment and total output. But they impose risks on current winners in the race for insurance.

Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated? People have lots of explanations, and I’m sure there’s truth in many of them. But I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades. Suddenly nearly everyone was poor in much of Europe. In the US, income inequality declined during the war. Military pay and the GI Bill and rationing and war bonds helped shore up the broad public’s balance sheet, reducing indebtedness and overall wealth dispersion. World War II was so large an event, organized and motivated by concerns so far from economic calculation, that squabbles between rich and poor, creditor and debtor, were put aside. The financial effect of the war, in terms of the distribution of claims in the US, was not very different from what would occur under Keen’s jubilee.

Although in a narrow sense, the very wealthy lost some insurance against zero-sum scarcities, the post-war boom made such scarcities less likely. It’s not clear, on net (in the US), that even the very wealthy were “losers”. A priori, it would have been difficult to persuade wealthy people that a loss of relative advantage would be made up after the war by a gain in absolute circumstance for everyone. There is no guarantee, if we tried the jubilee without the gigantic war, that a rising tide would lift even shrinking yachts. But it might very well. That’s a case I think we have to make, before some awful circumstance comes along to force our hand.


[1] It is interesting that even in very unequal, high productivity societies, one rarely sees the very poor reverting to low-tech, low productivity craft production of goods the wealthy can manufacture efficiently. One way or another, the poor in these societies get the basic goods they need to survive, and they mostly don’t do it by spinning their own yarn or employing one another to sew shirts. One might imagine that once people have no money or claims to offer, they’d be as cut off from manufactures as subsistence farmers in a low productivity society. But that isn’t so. Perhaps this is simply a matter of charity: rich people are human and manufactured goods are cheap and useful gifts. Perhaps it is just entropy: in a society that mass produces goods, it would take a lot of work to prevent some degree of diffusion to the poor.

However, another way to think about it is that the poor collectively sell insurance against riot and revolution, which the rich are happy to pay for with modest quantities of efficiently produced goods. “Social insurance” is usually thought of as a safety net that protects the poor from risk. But in very polarized societies, transfer programs provide an insurance benefit to the rich, by ensuring poorer people’s dependence on production processes that only the rich know how to manage. This diminishes the probability the poor will agitate for change, via politics or other means. Inequality may be more stable in technologically advanced countries, where inexpensive goods substitute for the human capital that every third-world slum dweller acquires, the capacity and confidence to improvise and get by with next to nothing.

Update History:

  • 4-Aug-2012, 6:10 p.m. EEST: Thanks to @EpicureanDeal for calling attention to my abysmal use of prepositions. Modified: “we have to trade-off extra consumption for by the poor against a loss of insurance by for the rich.” Also, eliminated a superfluous “the”: “The zero-sum, positional nature of the wealth-as-insurance is..”
  • 8-Oct-2012, 1:20 a.m. EEST: “If there is drought terrible so terrible”; “Perhaps this is simply a matter of the charity”
 
 

92 Responses to “Trade-offs between inequality, productivity, and employment”

  1. vbounded writes:

    Mr. Waldman, “Distribution is the core of the problem we face. I’m tired of arguments about tools. Both monetary and fiscal policy can be used in ways that magnify or diminish existing dispersions of wealth.”

    You are not tired of discussing tools. You refuse to discuss the core of the problem, which is the destruction of the regulatory regime that gave developed world workers pricing power to demand wage increases by economists pushing for world trade rules that allowed multinational companies to offshore jobs to low wage countries. And a one off debt forgiveness jubilee doesn’t fix things because in several years you’d be back to the same problem of excess debt because developed world workers would go back to borrowing more than they can repay. And permanent transfer payments from the rich to the poor are dissesteeming, so not politically acceptable. The only solution in terms of money and self-respect is reinstating protectionist polices to give workers pricing power versus workers in countries with lower wages, or a war killing large numbers of workers. But I don’t think economists want to discuss protectionism and autarky, or war. (WWII boosted US wages obviously by destroying large numbers of workers and plants outside the US.)

    And Kalecki didn’t originate worries about people voting the fisc. People have warned about that for over 2,500 years.

  2. Tom Hickey writes:

    How about status in addition to insurance, especially in societies where social status is more a matter of wealth than pedigree? Over the past several decades, wealth has become a much more important factor than pedigree for determining social status in the contemporary US. On the other hand, more recently insurance has come more to the fore and inequality widens and social unrest more prevalent. Other indications of this are the centralization and militarization of the domestic security force and the suspension of constitutional rights and civil liberties as the US slips further into the crypto-fascism of the right.

  3. Nicholas Weininger writes:

    This is an interesting theory but it stands or falls on a very curious premise, namely that a large proportion of what actually existing rich people do with their wealth is buy, not just insurance, but insurance of an inherently zero-sum kind against absolute systemic scarcity. Where is the evidence for that claim? You assert it but don’t back it up.

    I’m dubious in part because it does not appear at all true of the slice of rich people I know well, namely SF Bay Area/Silicon Valley techies. There is one big way in which they– well, we– do use our wealth for positional goods in inherently limited supply: we buy real estate in the Bay Area. But we don’t do that for insurance reasons, we do it because we want pleasant places to live near the jobs that enable our lifestyle. And our spending beyond that is driven by consumption goals that do employ people: we have nice houses built/remodeled on that inherently-scarce land we’ve competed for; we send our kids to private schools and hire nannies, cleaners, etc to make child-raising less onerous; we take elaborate vacations and buy early-adopter gadgets and eat at fine restaurants and amass collections of wine and custom-tailored clothing and so on.

    I can testify that sustaining that lifestyle requires wealth well above the 1% threshold. So if you’re going to have a theory where rich people insuring themselves in zero-sum ways distorts the economy as you say, then you must claim that either:

    1. most rich people use their wealth totally differently from the ones I know
    2. the relevant definition of “wealth” starts far enough above our wealth level to make the class of relevantly rich people very small indeed, the 0.1% or less rather than the 1%.

    Which are you claiming, and how do you support the claim?

  4. JW Mason writes:

    Nicholas Weininger-

    The part of wealth used for insurance is the part that is not consumed, but held in financial form. For the really rich — a status that indeed begins well above the 1% mark — this includes the vast majority of their wealth, only a small fraction of which is spent on consumption of any kind during their lives.

  5. JW Mason writes:

    A lot of this post is developing arguments that I have thought about vaguely but had not managed to put down anything like this clearly and coherently. There is one thing I’m wondering about, though. What about those low-productivity jobs? Are they really sales of labor just like jobs in the “core” sectors, just for less? Or are they actually just the general claim on the social product that we all get as members of society (our payment for consent, if you like), dressed up as if it were a payment for labor services?

  6. JW Mason writes:

    Meant to add, this post reminds me of this bit from Theories of Surplus Value:

    Assume that the productivity of industry is so advanced that whereas earlier two-thirds of the population were directly engaged in material production, now it is only one-third. Previously 2/3 produced means of subsistence for 3/3; now 1/3 produce for 3/3. Previously 1/3 was net revenue (as distinct from the revenue of the labourers), now 2/3. Leaving [class] contradictions out of account, the nation would now use 1/3 of its time for direct production, where previously it needed 2/3. Equally distributed, all [that is, the whole population] would have 2/3 more time for unproductive labour and leisure. But in capitalist production everything seems and in fact is contradictory… Those two-thirds of the population consist partly of the owners of profit and rent, partly of unproductive labourers (who also, owing to competition, are badly paid). The latter help the former to consume the revenue and give them in return an equivalent in services—or impose their services on them, like the political unproductive labourers. It can be supposed that—with the exception of the horde of flunkeys, the soldiers, sailors, police, lower officials and so on, mistresses, grooms, clowns and jugglers—these unproductive labourers will on the whole have a higher level of culture than the unproductive workers had previously, and in particular that ill-paid artists, musicians, lawyers, physicians, scholars, schoolmasters, inventors, etc., will also have increased in number.

    The payments to the majority of the population for not rioting or rebelling look better if they are dressed up payment for our work as mistresses, grooms, jugglers … or yoga instructors. Of course in a differently organized world, we could dispense with most of these jobs and take the benefits of increased productivity in some combination of shorter hours for productive workers and a shift toward more intrinsically fulfilling (craft-like) forms of productive work.

  7. Nicholas Weininger writes:

    JW Mason–

    But not all financial wealth is used for insurance purposes; some of it is amassed for direct future consumption needs, as when one saves for the down payment on a house; what is consumed may be leisure too– imagine someone saving up so they can take a sabbatical or retire early or “downshift”. And even the insurance portion of financial wealth needn’t all be of the zero-sum positional type.

    But suppose some significant share of, say, the income of the top 0.1-0.2% of the population is directed this way. Per http://www2.ucsc.edu/whorulesamerica/power/wealth.html the top 0.2% get 13-16% of all income these days in the US (depending on year). This is a hugely disproportionate number in one sense, but it is still a smallish minority of all income, and it puts a limit on how much disemployment effect we can expect to see from the insurance-direction of some subset of that income.

    Then, too, the increasing income of that tier is dominated by financial sector returns which reflect other economic distortions that hurt employment. So it’s not clear to me how you’d distinguish the hypothesis that increasing insurance-direction by the greatly enriched top 0.1-0.2% is hurting employment from the alternative hypothesis that financial sector rent-seeking is both hurting employment and enriching the 0.1-0.2%.

  8. […] is a new post from the excellent Interfluidity.  I read it as a version of Keynes’s chapter seventeen, where the demand to buy insurance […]

  9. JW Mason writes:

    But not all financial wealth is used for insurance purposes; some of it is amassed for direct future consumption needs, as when one saves for the down payment on a house; what is consumed may be leisure too– imagine someone saving up so they can take a sabbatical or retire early or “downshift”.

    This kind of lifecycle saving plays no role for the rich. Their current income exceeds their consumption in all periods.

    But suppose some significant share of, say, the income of the top 0.1-0.2% of the population is directed this way. Per http://www2.ucsc.edu/whorulesamerica/power/wealth.html the top 0.2% get 13-16% of all income these days in the US (depending on year). This is a hugely disproportionate number in one sense, but it is still a smallish minority of all income, and it puts a limit on how much disemployment effect we can expect to see from the insurance-direction of some subset of that income.

    I disagree. All that is required is that expenditure by the rest of us be reasonably related to current income. In that case, we get a multiplier. And remember, even the worst recessions involve only modest falls in output. So yes, if wealth owners seek to divert assets equal to a point or two of GDP from production of goods and services to safer financial claims, that’s more than enough to cause a severe downturn and enormous misery.

  10. JW Mason writes:

    it’s not clear to me how you’d distinguish the hypothesis that increasing insurance-direction by the greatly enriched top 0.1-0.2% is hurting employment from the alternative hypothesis that financial sector rent-seeking is both hurting employment and enriching the 0.1-0.2%.

    I think the second claim is really just a version of the first. As Mitt Romney would say, the financial sector is people; specifically the owners of financial assets, in whose interests it operates. The reason we have a financial sector, at the end of the day, is specifically in order to allow rich people to hold their claims on society’s wealth in the abstract form of money rather than as authority over specific production processes.

  11. […] Trade-offs between inequality, productivity, and employment – interfluidity […]

  12. […] Trade-offs between inequality, productivity, and employment – interfluidity […]

  13. Harald Korneliussen writes:

    Nicholas Weininger: I think Silicon Valley entrepreneurs (and employees) are in a special category, you may be rich in relative terms and still live a life that is essentially middle class – in the sense that you spend most of your income – due to real estate prices and generally high costs of living where you do. Real estate is ultimately driving it, I think – real estate is special in many ways.

    Question is, how much do you save/invest without a clear plan for how you will spend it? Even I do that, so I’m pretty sure you do too. But when we do this, it seems to me we’re “buying” the sort of insurance Waldman speaks of. On a very modest scale, not really consciously. And obviously the wealthy – or more accurately, the upper class – do a lot more of it.

    It’s not immediately obvious to me when and how it should be zero-sum, though. Why is this vague future insurance in limited supply?

  14. Doc at the Radar Station writes:

    “…I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades.”

    Excellent insight! Kind of like the elite’s ant farm got kicked. Now we just need to reboot the HAL9000.

  15. Becky Hargrove writes:

    I still stubbornly believe that a debt jubilee is not necessary. The rich do not have to give up their hoarding, they only need to allow lower income to create more affordable realities for themselves. Allow technology to give us simple and affordable living units that even a disabled person could put together or take apart. Allow people to utilize freed up land with portable infrastructures that can be remobilized as needed. Allow people to fashion the kinds of economies they actually want to take part in with one another so that they do not have to feel useless and constantly dream of escape. I will not give up on these dreams.

  16. Jan Smith writes:

    The context: high income concentration causes growing saving glut which causes growing asset-price volatility which settles into stable stagnation?

    Perhaps there are other important causes of the last three or four decades of the growing global saving glut. I nominate geopolitical competition among sovereign states combined with a single market system. Of course, because of bounded rationality, some states/nations will save more than others. Specifically, neo-mercantilist states/nations will save far more than neoliberal/supply-side states/nations. China or Japan vs. USA or UK, for instance.

    Also, some national cultures/institutions constrain income concentration more than others. Perhaps some national populations are less desirous than others of disaster insurance? Or, given constant desires for insurance (which you seem to assume), some national populations have more solidarity (aka ethnocentrism) and, hence, more constraint on income concentration, than others. Japan or Germany vs. USA or Greece, for instance.

  17. Detroit Dan writes:

    Very good, thought provoking post.

    My one objection is SRW’s false equivalence between monetary and fiscal policy. As with most instances of false equivalence, it lets him avoid an issue which might distract from the point he’s trying to make. But it’s false nonetheless. Monetary policy is a weak tool and in no way comparable to fiscal policy, as the WWII example makes clear.

    As Winterspeak put it: “Monetary policy in general has no mechanism to clearly stimulate (or dampen) economic activity, therefore Monetarist are reduced to talking about magic (the Confidence Fairy) or dressing up fiscal policy and calling it monetary policy.” [Winterspeak – NGDP Futures: Fairies helping Goldman Sachs]

  18. Orange14 writes:

    Regarding the comment on WWII, the other obvious explanation is that with the destruction of industry in Europe (save Great Britain, though there was clearly damage there) and Japan, the US economy was not troubled by imported goods. We were also self-sufficient in energy. With what was essentially a captive market and a huge industrial machine that was cranking out planes, tanks, and other military equipment all that had to be done was to transition to consumer goods. Remember that most of the automobile industry was largely converted to military uses during the war (my dad was a project manager in the aircraft industry and part of his job was traveling around to other company plants to coordinate production schedules; antitrust laws were not a factor during the war!) . Pent up demand because of rationing translated to a lengthy consumer boom that started to slow down when imported goods became more available (and necessary in the case of oil).

  19. OGT writes:

    Great post, very thought provoking and useful as a counter weight to the unsubstantiated claims that wealth is only deferred consumption. Obviously deserves to be fleshed out with further research.

    I’d add that the role of positional goods deserves some thought, for at least the near wealthy if we expanded the model to include more categories, which from a political economy perspective is, I think, important.

    And on WWII, I’d add that that event could be thought of as the wealthy spending some of their insurance at least in the US and Britain, and undoubtedly a bargain at the price.

  20. Steve Roth writes:

    Out of the park again, as usual. Great post.

    On “risk”: I’ve been thinking of it more lately in the obverse, as certainty, and freedom.

    We don’t just hold money to defer current consumption; we hold it to defer *decisions* about future consumption (and investment, and “saving”) until we know (better), have more certainty about, what the future holds. The ability to defer those decisions is freedom.

    Apologies to Kris Kristofferson:

    Freedom’s just another word for…having money.

  21. beowulf writes:

    “Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. ”

    The Titanic was a libertarian Titanic, First class passenger survival right exceeded Second class survival rate which exceeded Third class survival rate. It was only after the Titanic sinking that it became a legal requirement for ships to carry enough lifeboat seats for every passenger.

    As for what “enough lifeboat seats for every passenger” means in economic terms, FDR’s Economic Bill of Rights is as good as road map as any.
    http://www.youtube.com/watch?v=effDfpKYcVo

  22. MPS writes:

    In addition to insurance, wealth buys social status. You can think of the yacht as a piece of insurance, but in the event of a catastrophe, the yacht is worthless. As are many other luxury items (paintings, mansion, fancy cars, etc.). In the event of catastrophe, the only real currency is the things people really need. All these things, then, are better understood as status signals.

    I say this because social status, like insurance, is something that must be vigilantly guarded, and it flows according to a zero-sum game as well. So it works equally well to explain why you can never have enough wealth. In your titanic analogy, one replaces the number of life-boats with the number of desirable romantic partners, or the number of chairs at the VIP table.

    I think your analysis still follows. The status currency of wealth is not just the things you own — the yachts and paintings and mansions etc. — it’s the things you can buy at a moment’s notice. This is how you “guard” your status. And so you’re hesitant to spend too much; you must keep a lot in reserve. (I concede that at this point, my comments are sounding like your insurance argument. But the context is different, I think.)

  23. Morgan Warstler writes:

    Some interesting stuff, but the deeper policy implication is silly and wrong…

    I typed it out before so I’ll not do it again:

    http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

    My Guaranteed Income plan to Auction the Unemployed puts 100% of marginal workers to work as any auction does, simply because the lowest price man week ($40), is low enough that virtually EVERYONE in the top 1/3 of the population can go acquire themselves all kinds of new low cost man servants.

    And that is a the worst case scenario.

    In reality we see how deeply wrong Waldman is because NEW FIRM CREATION, and thus greater incumbent turn-over, becomes incredibly easy when all talent is organized and tracked week by week.

    So:

    1. EVERYONE is employed by a bossy boss who seeks to maximize returns.
    2. EVERYONE is terrified of being suspended from the GI plan for obvious worker laziness.
    3. EVERYONE has their nut covered as long as they give it the good old man servant try.

    And you gain greater incumbent turn-over, lower cost services for the poor and their communities.

    Waldman hasn’t done enough hiring in ODESK, Craiglist, etc. or watch enough $1 auctions on Ebay to see how wrong he is.

    We can have maximum productivity, enforced distibutism, fairer capitalism, and do it all by just offering a GI to anyone who agrees to honestly participate in the auction of their labor.

  24. Morgan Warstler writes:

    On other small quibble…

    Positive rights are not endless and growing. In fact they are limited, no matter how great the “inequality” once the bottom has X,Y,Z – they are covered and the rest can move forward mentally and morally comfortable that they have no further obligation.

    And every year, the cost of delivering X,Y,Z goes down.

  25. Lord writes:

    Land is the ultimate positional good and generally not produced at all, so while you can put it as just wanting a nice place to live and household services being demand for labor, these pale in value to the wealth stored in land. As Karl Smith says, capital investment is land and structures, mostly land though. The less that is spent on everything else, the more that is spent on land.

  26. Michael Abramoff writes:

    “The Titanic was a libertarian Titanic, First class passenger survival right exceeded Second class survival rate which exceeded Third class survival rate. ”
    ->
    This is false.
    *Women* had a higher survival rate than *men*, and the percentage of women was higher in First than Second, and higher in Second than Third. That is why it seems that class was the primary factor in survival.

    The Titanic is a prime example of male heroism, not of a society based on class.

    http://www.anesi.com/titanic.htm

  27. JW Mason writes:

    s Karl Smith says, capital investment is land and structures, mostly land though.

    Karl Smith says that? That’s pretty smart.

  28. Dan Kervick writes:

    This is a very stimulating piece SRW. Thanks for writing it.

    I am hung about a bit on this idea:

    If insurance were not so valuable, it would be perfectly possible to have very high levels of inequality and have full employment. The very rich might employ endless varieties of servants to cater to their tiniest whims. They’d get little value from the marginal new employee, but the money they’d lose by paying a salary would have very little value to them, so the new hire could be a good deal. But because of the not-so-diminishing insurance value of wealth, the value of hiring someone to scratch yet another trivial itch eventually declines below the insurance value of holding property or claims. There is a limit to how many people a rich person will employ, directly or indirectly.

    Consider some population P consisting of all of those who own the resources for production and consumption. Assume that within that population P, ownership claims on that store of resources are distributed equally, or held in common. Assume all productive work is done within P by the members of P to satisfy the consumption desires of the members of P alone. Assume the work effort is divided up in some manner that seems equal and fair to all, and the productive yield is also divided up equally. There is some insecurity about the contingencies of the future, so the members of P work hard enough to produce a surplus, which we can imagine is either distributed equally among them or saved. So we start with an initial state of communism.

    Now suppose the members of P are not satisfied. They have abundant unemployed material resources that are saved perpetually, and sometimes go to waste, not because of anxiety about the future, but simply because there are not enough total hours in their all too finite lives, given the constraints imposed by the size of P itself, to dedicate to the work that would transform these resources into valued consumable goods. If some race of magical beneficent gnomes would visit them, do work on these unused resources, ask nothing in return, and hand the product over to the members of P as a gift, the latter would all be delighted. If some of these gnomes could also sing songs, tell jokes, draw pictures of the Arcadian homeland of the gnomes, and play enchanting tunes on their little gnomish instruments, so much the better.

    However, there is a limit to the amount of work the members of P would appreciate. Beyond a certain number of gnomes, and a certain number of gnome-hours of work on the unemployed resources, the members of P would reach a point of satiety. Even if the members of P were as gluttonous and lusty and sensual as human beings can be, they would eventually reach a point where they say, “OK, that’s enough gnomes.”

    Let’s suppose now that the members of this society learn how to create real gnomes in a laboratory, at a tiny cost per gnome. These gnomes are not exactly magical. They do have to eat a tiny bit to subsist, and require some modest shelter to survive, but are energetic little workers who are put to work doing the kinds of work that the members of P intend for the satisfaction of their needs. The additional output is more than enough to provide for the meager subsistence needs of the gnomes themselves along with the substantial improvement in the well-being of the members of P.

    The gnomes are weak and generally cheerful little creatures, but are capable of some resentment. So among the things the members of P direct the gnomes to do is build some security fixtures and weaponry to protect the members of P against possible future uprisings of grumbling gnomes. Also, because of this added bit of insecurity and anxiety in their lives, the members of P adjust their savings desires, and deliberately set aside some of the resources. They also see to it that the combination of gnome labor and their own labor generates a larger surplus than previously.

    Still, the members of P are finite human beings, with finite lives and a finite capacity to enjoy goods. There is thus some optimal gnome population G such that there lives keep improving until they have produced G many gnomes, but once they have reached G, the costs of producing, sustaining and guarding against additional gnomes exceeds the benefits to be gained from having more gnomes.

    Now suppose the methods the members of P use for producing gnomes are not exact. Sometimes more gnomes than are needed are germinated by accident. What to do with these extra gnomes? Well the additional gnomes are a security cost that in itself diminishes the standard of living for P. But these costs are very small, because the gnomes are so weak. And the costs can be minimized so long as the extra gnomes are not provided with a subsistence, which costs the members of P more than they benefit from any additional gnome output that exceeds the satiety level for P.

    So it seems to me that even if the marginal insurance value of additional savings is vanishingly small, there is no guarantee in theory that a society run by the owners of the means of production and consumption will always find it useful to employ the entire population, no matter how greatly it exceeds P. For a given world with given resources, and a population P consisting of the controllers of those resources, there will be some optimal additional population G of non-controllers, such that if the population is P + G + X, then X people will be unemployed.

  29. JW Mason writes:

    “Monetary policy in general has no mechanism to clearly stimulate (or dampen) economic activity, therefore Monetarist are reduced to talking about magic (the Confidence Fairy) or dressing up fiscal policy and calling it monetary policy.”

    I agree with the spirit of this 100% — I’ve been blogging about the limits to monetary policy myself lately. But the quoted statement is too general. It really depends on the institutional and regulatory specifics of the financial system. When you have binding reserve requirements, as was true in rich countries through much of the mid-20th century, central banks do have pretty strong tools to control the general pace of credit creation. Where you have speculative asset positions financed by short-term borrowing, as in the early 20th century and again recently, monetary policy can have a big effect on asset prices. Etc. What is true is that monetarists almost always ignore the actual transmission mechanisms of monetary policy, and only talk about the Expectations Fairy (a relative or colleague of the Confidence Fairy, but not quite the same.)

    Also, you know that “monetary policy doesn’t work” was the mainstream Keynesian position in the immediate post-WWII period, right? I have no problem with reviving the orthodoxy of 50 years ago — so much better than the orthodoxy of today — but I wish that MMTers would acknowledge that that’s what they’re doing.

  30. JW Mason writes:

    Dan K. @28-

    I think you are missing the point that lots of existing employment is completely unnecessary from a technical standpoint. It exists because useless jobs are more socially stable than either mass poverty or a social wage. All that matters, for the purposes of this post, is that expenditure on these useless tasks have a reasonably strong relationship with current income.

    In the long run, work will be found for people along the lines of the Marx passage I quoted @6. (This is not true in poor societies, where a large portion of the poor engage in subsistence labor, of either the traditional or garbage-picking variety.) In the short run, employment will rise and fall as the rich feel a smaller or a greater need for the insurance-value of financial wealth.

    In general, you should know that reasoning this stuff out from first principles for a world without money or finance, is not a reliable way to think about economics.

  31. Nicholas Weininger writes:

    JW Mason, you say
    “The reason we have a financial sector, at the end of the day, is specifically in order to allow rich people to hold their claims on society’s wealth in the abstract form of money rather than as authority over specific production processes.”

    This is true only for a larger definition of rich people, and a larger set of uses of those claims, than you’re relying on elsewhere. Financial abstractions’ benefit does disproportionately flow to people near the top but it’s not even close to benefiting only 0.1%ers, much less benefiting only their hedging against supply shocks.

    And that’s what this is really about, isn’t it? The claim is that we see increasing resources directed not to productive investment but to bidding up assets that will (or at least the bidders think they will) hold their value in the face of exogenous negative supply shocks. As Harald Korneliussen is I think implying, you need this distinction to make the mechanism of inherent limitation on that insurance (and thus rationing of it by price) work. I still haven’t seen on this thread any suggested empirical way of testing the claim.

    But if you think it’s true, then presumably you should seek policy responses that make such assets less attractive/effective, and are also good on other efficiency grounds in case you’re wrong, no? Which might include:

    — Georgist taxation to capture rents on inherently fixed-supply assets

    — NGDP targeting to reduce cash hoarding during slowdowns

    — Easier mechanisms for (full or partial) default on various sorts of debt, up to and including sovereign debt

    So the tools do matter here.

  32. Dan Kervick writes:

    JW Mason, I’m just trying to use a fanciful counterexample to provide a motivation for the hypothesis that it is not the insurance value alone of the savings of the wealthy that is responsible for unemployment, and that we could have unemployment even that insurance value were negligible.

    Some might argue that if we could reduce the property insecurity and political insecurity of the wealthy, they would employ more people. And perhaps that is true. But it could also be true that even with negligible security concerns, the wealthy would not have the incentive to create full employment.

    It is also worth entertaining the hypothesis that the insecurity of the owners of capital is itself partly responsible for employment. Given the concentrations of wealth that might prevail in a given society, it could be the case that the owners could achieve satiety with 20%, 30% or 40% unemployment, and only employ the rest because they have it in the back of their minds that if they don’t then hordes of the unemployed will show up with pikes and brickbats.

    I agree that you can’t determine the answer to these questions in an a priori manner, but SRW is reasoning hypothetically from assumptions and general principles, and so I’m just suggesting an alternative possibility.

    On the question of whether there is a significant amount of technically useless employment, I only partially agree with you. The world I see is one in which there is always far more useful work to be done than there are human-hours to do it. There might indeed be people performing worthless tasks, or tasks whose value is not equal to the value of the share of output they receive in return. But I see situations like this as cases of inefficiency and the waste of human potential, and a challenge for improved social organization.

    I’m not a believer in the robot paradise vision of our technological future. Human beings are finite and mortal, but their ambition to enhance the length and power of their existence is effectively unlimited, and extends, so to speak, into eternity. I don’t think we’ll ever have a society in which we have substituted so-called “leisure” for most of our work. As we become more productive, that only frees us up to do new and different kinds of work that previously we couldn’t dream of doing, and to satisfy new desires that we create for ourselves in the process of progressing. If people figure out how to live to be 150, they will want to live to be 200. And they will want to then figure out how to preserve the vitality of youth further into the lifespan. They will want to enhance their knowledge and talents, and the brains they need for attaining that knowledge. My feeling is that there will always be a frontier of existing human capacity, and the process of extracting new kinds of value from pressing ourselves up against that frontier will always be challenging and onerous. Most of us will want to press on, and those who don’t will be compelled to follow to earn their living. In one way or another, the human project is a collective endeavor, and we demand from one another that everyone does a fair share of the total work effort in exchange for a fair share of the output of goods the society is generating.

  33. winterspeak writes:

    What about the desire to pass wealth on to your children, or does the love a parent feels for a child not count in Steve’s bold, egalitarian utopia?

    Collectivist schemes of all sorts took aim at the family.

  34. Lenny writes:

    On a sinking boat power not money (or insurance)decides.
    In a famine power not money (or insurance)decides.
    When a mob takes over, contracts whether comprising honour, love, respect, presteige, ect. are nil and void. I am sure the rich insure themselves against the mob somewhat. Is this a fight over the premiums?

  35. JW Mason writes:

    On a sinking boat power not money (or insurance)decides.
    In a famine power not money (or insurance)decides.

    Of course. And under capitalism, power preeminently takes the form of money. 500 years ago, the rich would have been seeking to accumulate land and titles as their hedge against the unknown future. Which from the point of view of encouraging productive activity, was even worse.

  36. Will writes:

    “Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated?”

    I think it is reasonable to argue that wars with population-wide conscription always shake up class hierarchies, for several reasons: because commitment and sacrifice is required from the entire population; because the experience of military service has elements of solidarity and classless meritocracy (think: the poor, foreign-born bastard Alexander Hamilton, rising to be aide-de-camp for General Washington); and because the scarcity of manpower on the homefront gives laborers enormously more bargaining power.

    In addition to what SRW says, it seems notable that full employment survived for almost exactly a generation after World War II. I wonder if the idea that the “greatest generation” deserved a sort of war-service dividend had anything to do with it.

  37. Will writes:

    JW Mason (quoting Marx):

    “Those two-thirds of the population consist partly of the owners of profit and rent, partly of unproductive labourers… It can be supposed that… these unproductive labourers will on the whole have a higher level of culture than the unproductive workers had previously, and in particular that ill-paid artists, musicians, lawyers, physicians, scholars, schoolmasters, inventors, etc., will also have increased in number.”

    This is why it seems to me that the productive-labor/unproductive-labor categories of classical economics is complementary to Veblen’s categories of production/conspicuous waste. Employing a literate and cultured servant to waste time in the view of others may aid social cohesion (as you suggest), but the fact of their being cultured also vouches for the employer’s status.

  38. JW Mason writes:

    Dan K.,

    With due respect, I think you’ve taken a wrong turn here. It seem like you are trying to give a supply-based explanation of unemployment. I.e. how the allocation of some stock of productive resources by some decision makers could generate unemployment. But unemployment is strictly a phenomenon of aggregate demand. Unemployment as we know it is *not* characterized by exogenous factor supplies and Leontief-type production functions, where some factors are exhausted leaving an excess supply of their complements. Unemployment inn capitalist economies involves laid-off workers *and* idle factories; it involves unemployed construction workers *and* rising homelessness; it involves idle farmworkers and apples rotting on the trees. Unemployment cannot be explained without talking about aggregate demand anymore than financial crises can be explained without talking about money and credit. It exists only to the extent that income and expenditure are determined simultaneously.

    Unemployment rises when planned money expenditure falls for a given expected money income; unemployment falls when planned money expenditure falls for a given level of expected money income. Conditions of production have no (direct) effect one way or the other.

    it is natural to think of unemployed people as people not engaged in productive work. This is wrong. The two things have nothing to do with each other. Unemployed people are those whose usual or primary claim on the social product takes the form of a wage, but who are not currently receiving a wage. There are lots of people who do not receive wages but are not unemployed because they have other claims on the social product — children, retirees, students, caregivers, the institutionalized, etc. Almost all of tehse people are capable of productive work, and many are actively engaged in it — caregiving and other forms of household production are essential to society’s continued existence. At the same time, there many people who do receive wages but who are not engaged in productive work; we’ll define these as people whose employment is part of the consumption out of rents.

    While there is no relationship between people’s capability for and/or engagement in productive labor, on the one hand, and unemployment, on the other, there is a close link between aggregate expenditure and employment, simply because a very large fraction of expenditure takes the form directly or indirectly of wages, and aggregate wages adjust mainly on the extensive rather than the intensive margin. So when we see people unemployed, we should never ask, why does the production of society’s desired outputs no longer require their labor input? That is a nonsense question that will lead nowhere but confusion. Instead we should ask, why has there been a fall in planned expenditure?

  39. Philip Wallach writes:

    An ironic implication of SRW’s post is that agitators worsen their own conditions by increasing the value of insurance relative to consumption, thereby decreasing total output and thus employment. Were they to simply devote themselves to insisting on the integrity of property rights, and indeed believing in them with every fiber of their beings, then the need for insurance would go down and consumption (however marginally beneficial) should go up.

    In any case, I worry that like so many of SRW’s blinding flashes of insight, this one proves rather too much. What is so special about this historical moment that means the cycle of the last three centuries ends here? I can’t really accept with a straight face the idea that our rich people have hit the wall in their ability to consume. For goodness sake, large scale ego-promoting redistribution of wealth is a whole new frontier of high-status consumption!

  40. JW Mason writes:

    An ironic implication of SRW’s post is that agitators worsen their own conditions by increasing the value of insurance relative to consumption, thereby decreasing total output and thus employment.

    Could be. Same way that successfully demanding higher wages sometimes deters investment and raises unemployment. (And sometimes has the opposite effect, of course — aggregate demand in capitalist economies can be either profit-led or wage-led.) Capitalism is a crazy, irrational system, and sometimes efforts to make things better within this system end up defeating themselves. So, we can give up. Or we can work for a better system.

    What is so special about this historical moment that means the cycle of the last three centuries ends here? I can’t really accept with a straight face the idea that our rich people have hit the wall in their ability to consume.

    I don’t see that implication in the post. Consumption has never been the purpose of wealth.

  41. beowulf writes:

    “The Titanic was a libertarian Titanic, First class passenger survival right [rate] exceeded Second class survival rate which exceeded Third class survival rate. ”
    ->
    This is false.”

    From your link…
    “This method shows that the expected overall survival rate for first class passengers was 44.68%, for second class 40.46%, for third class 36.32%, and for crew 21.38%.”

    So you mean its false in the sense that its actually true.

    “The Titanic is a prime example of male heroism, not of a society based on class.”

    Right, its merely a statistical anomaly that 100% of the children in First class, 100% of the children and Second class but only 34% of the children in Third class were saved.

    “The International Convention for the Safety of Life at Sea (SOLAS) was established in 1914. It passes regulations that require ships to carry enough lifeboats for all those on board.”
    http://www.telegraph.co.uk/travel/cruises/9017985/Cruise-ship-safety-timeline-of-disasters-and-safety-regulations.html

  42. Dan Kervick writes:

    JW Mason,

    I’m not sure whether I agree with you or disagree with you. I don’t know what a Leontif production function is so I don’t know what kind of supply side views you are attributing to me.

    But first, I am just trying to engage directly with what I understood to be SRW’s argument. Maybe I misunderstood the argument. But I understood him to be arguing that unemployment can occur when the insurance value of surplus wealth grows to such a degree as to diminish the willingness of the possessors of that wealth to use as much of it as they were using before to employ others to perform some labor services for them. I don’t really disagree with this, but I was trying to make the point that – it seems to me – unemployment could also occur even if the insurance value of the surplus wealth is not high. The people who, in aggregate, own all of the resources that could be used either as inputs for production, or as something to be exchanged for labor services that accomplish that production, might simply lack the incentive to employ those resources in that way.

    What are the causes of unemployment? It seems easier to me to ask, “What are the causes of employment?” Employment is caused by people who own various kinds of resources hiring others to perform labor services which transform those resources into something different – something such that the addition of value that is brought about is worth to the owners whatever they have to surrender to the laborers in order to obtain the labor. Unemployment is caused by potential employment not happening. Involuntary unemployment happens whenever the total number of people that the owners of resources are willing to employ is less than the total number of people who are willing and able to work – and I doubt we can give some single uniform reason why that sometimes happens. In a society based on private property, employment occurs at the pleasure of the owners of resources. People who own no resources can’t employ themselves.

    Can a decrease in aggregate demand cause a decrease in employment? Sure, but demand is not just just desire, right? Demand for some collection of products depends for its existence on the existence of people who don’t just have a desire for that product, but have something to exchange for the product that the owner of the product views as worth obtaining. I assume that a change in aggregate demand can result from a variety of factor. People might become insecure and come to have more intense savings desires. Their tastes might suddenly change. Or the employers of labor might have collectively decreased the wages of their workers over time, so that the workers can no longer afford to buy as much of the output as they did previously – or at least are not willing to pay the same prices they paid previously. An unanticipated drop in aggregate demand will, I assume, lead to an initial surplus of output that either goes to waste or is sold at a loss, and if the producers expect the low demand to persist, that will result in a decrease in production and the laying off of workers. As Keynes argued, after that initial result happens, the economy can settle into a stable state of persistent unemployment for a long time – an equilibrium in which there is not full employment. At that point, I’m not sure it makes sense any longer to say that the problem is either an aggregate demand problem or supply probelm, since the new supply and demand curves are doing their thing, and there is an equilibrium.

    Given certain kinds of systems of private property, with the possibility of very unequal ownership of the society’s resources, it is sort of amazing that there would ever be something close to full employment. But societies with persistent unemployment can employ more people if they manage to lay hold of enough power to command unemployed resources, and transfer some of those resources directly from their current owners to new owners. This readjusts the distribution of the power to produce along with the incentives to produce. The public itself, as a political body, might decide to transfer real resources to itself and become one of the producers. Or it could distribute newly created money – claims on future output, to redistribute purchasing power and accomplish some of the same effects.

    I know its difficult to define employment and unemployment. Yes, people who would like to work in other circumstances are almost always doing something productive. Even if they are begging alms, or growing potatoes in the abandoned warehouse behind the box they live in, or gathering crabs and mussels on a public beach, that is a kind of labor that produces an income. Maybe everyone commands some resources. But I suppose we want to define unemployment in terms of the availability of work opportunities that provide an income that meets some minimal threshold of decency.

  43. vlade writes:

    Steve,

    it’s rarely that I disagree with what you write, but I do now. In my experience, “as consumers, our requirements are limited” is false. Few years ago I thought the same, but then I had a chat with a friend – who’s a reasonable person, not someone weird – and we were talking about new cars. I was wondering why he wanted to buy a new car when his “old” one was only two years old. He happily admitted he’d buy a new car every month if he could.

    Of course, pushing ad absurdum he can’t buy continuously, but he can buy more and more expensive cars monthly – as long as there are more expensive cars, and I believe if there’s demand, there’d be supply.

    Our _physical_ needs are limited. We can’t live in two appartnemtns/houses at once. We can’t consume more than say 20 kgs of food a day (most of us, anyways). Etc. etc. Where the unlimitnedss comes from is comparison. We compare ourselves to others – how big a house we have, how good a car, what education our children got etc. etc. On those, sky’s the limit, and it’s self-reinforcing. Ultimate measure is the size of bank account (so to say), but hardly anyone I know who I’d claim is “rich” is even remotely thinking about it in terms you describe (short of a few apocalypse-nuclear-war types).

    The insurance you’re talking about is too rational – and as a rational measure, even that has at some stage only minimal marginal benefits. I don’t agree with your Titanic scenario – the rational behaviour there is to buy your own lifeboat (a different Titanic) before you board ;). Can you come with a more plausible scenario? Nuclear war – well, money is worthless there, it’s the shelter, guns and sustenance that count. Revolution? History shows that if you’re there, even if you squirreled some/most of your wealth away, it’s not going to help if you’re dead. Moreover, there’s only limited number of places you can squirrel reasonably safely (places, not assets!). If we’re all on a Titanic, and can never get off, where would your lifeboat take you, even if you were able to buy it?

    Moreover, large number of very rich people have they wealth hugely concentrated, which again is the counterclaim to the insurance interpretation as opposed to the status.

    The real problem with inequality I see in an entirely different place, and to an extent it’s irrelevant why the inequality grows as far as the consequences go – it can be insurance that drives it,or status, or combination, or something entirely different – I don’t believe for a second that we will be able to do something effective about the cause (on a timescale measured even in a few generations), since whatever it is, it’s deeply ingrained into us as humans (hey, we even haven’t figured out how to live in large concentrated societies