Posts Tagged ‘labor’

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Technically, there is no Nobel Prize in economics. What it is, instead, is the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, which members of the Nobel family and a previous winner (Friedrich von Hayek) have criticized.

So, where did the prize come from? As Avner Offer explains,

The Nobel prize came out of a longstanding social conflict. On one side, central banks and the better-off striving to keep property intact and prices stable; on the other, everyone else’s quest for economic security. The Swedish social democratic government clipped the wings of the central bank – Sveriges Riksbank – in pursuit of more housing and jobs. In compensation, the government allowed the central bank to keep some funds, which the bank used in 1968 to endow the Nobel prize in economics as a vanity project to mark its tercentenary.

This year’s Nobel Prize in Neoclassical Economics (as I dubbed it 5 years ago) was awarded jointly to Oliver Hart and Bengt Holmstrom. Officially, the 2016 prize recognized “their contributions to contract theory.” Unofficially, as I understand their work, it was all about attempting to solve a longstanding problem in neoclassical economic theory: the theory of the firm.

Historically, neoclassical economists (and, for that matter, not a few heterodox economists) simply assumed capitalist firms maximize profits. But, in the context of a market system, there’s no particular reason a non-market institution like “the firm” should exist (instead of, for example, everyone—workers, managers, suppliers, buyers, and so on—entering into market exchanges in parking lots or coffee shops each morning).* And yet corporations, many of them employing hundreds of thousands of workers and making record profits, have become central to the way capitalist economies are currently organized. Moreover, once you look inside that “black box,” a great deal more is going on. Workers are hired to perform necessary and surplus labor in the course of producing commodities by managers, who run the enterprise on a daily basis and receive a cut of the surplus from the board of directors, who themselves need to be elected by shareholders (who, together with money-lenders, merchants, government officials, and many others, inside and outside the enterprise, receive their own portions of the surplus). Corporations, as it turns out, are pretty complicated—political, cultural, and economic—institutions.

But when neoclassical economists like Hart and Holmstrom look inside the firm what they see is a single issue—a relationship between a “principal” and “agents.” Principals (e.g., capitalists) are presumed to enter into agreements—voluntary contracts—with agents (e.g., workers) to advance a goal (e.g., of maximizing profits). As they see it, contracts are risky because, first, principals and agents often have conflicting interests (e.g., principals want maximum effort while agents are presumed to engage in risk-averse, shirking behavior) and, second, measuring fulfillment of the goal is imperfect (that is, not all the actions of the agents can be perfectly observed). The whole point of contract theory, then, is to devise a relationship such that—through a combination of incentives and monitoring—agents can be made to work hard to fulfill the goal set by the principal.

In one of his most famous and influential papers, “Moral Hazard in Teams” (pdf, a link to the working-paper version), Holmstrom’s starting point is the idea that there’s a problem of “inducing agents to supply proper amounts of productive inputs when their actions cannot be observed and contracted upon directly” (in other words, moral hazard), especially when they work in teams. He then sets up a model in which he demonstrates that “separating ownership from production”—which also provides the incentive for limited monitoring by the owners (i.e., stockholders)—solves the problem of moral hazard and restores efficiency.**

In other words, the Nobel Prize-winning approach to contract theory is used to demonstrate what neoclassical economists had long presumed: that capitalist firms (and not, e.g., worker-owned enterprises) represent the most efficient way to organize production.

That’s why, from a neoclassical perspective, it is only natural that capital hires labor.

 

*In fact, Paul Samuelson (in 1957, in “Wages and Interest: A Modern Dissection of Marxian Economic Models,”American Economic Review) once argued that “In a perfectly competitive market, it really doesn’t matter who hires whom: so have labor hire ‘capital’.”

**Hart, for his part (in a paper with John Moore [pdf]), looked at the issue of property rights in relation to firms by distinguishing between owning a firm and contracting for services from another firm. Their model shows, once again in true neoclassical fashion, that the owner of an enterprise—who exercises “control,” not only over assets, but also over the workers tied to those assets—will have more control, leading to higher efficiency, if they directly employ the workers than if they have an arm’s-length contract with another employer of the workers. That’s because, under single ownership, the employer can “selectively fire the workers of the firm” if they dislike the workers’ performance, whereas under contracted services they can “fire” only the entire firm.

 

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I’ve been writing for some years now about the emergence of new technologies, especially automation and robotics, and their potential contribution to raising already-high levels of inequality even further.

The problem is not, as I have tried to make clear, technology per se but the way it is designed and utilized within existing economic institutions. In other words, the central question is: who will own the robots?

If capital owns the robots, even if their development and use increases labor productivity, the returns mostly go to capital and the workers (those who are left, in addition to those who have been displaced) are the ones who lose out.

But you don’t have to believe me. That’s the conclusion of a recent piece published in Finance & Development, the research journal of the International Monetary Fund.

The authors, Andrew Berg, Edward F. Buffie, and Luis-Felipe Zanna, designed an economic model in which they assume robots are a particular sort of physical capital, one that is a close substitute for human workers.* They also consider three versions of the model: one in which robots are almost perfect substitutes for human labor; another in which robots and human labor are close but not perfect substitutes (i.e., “people bring a spark of creativity or a critical human touch” that cannot, at least for the foreseeable future, be replaced by robots); and a third in which they distinguish between “skilled” and “unskilled” workers.

In all three cases, output per person rises—but so does inequality. As the authors explain for the first version:

If we assume that robots are almost perfect substitutes for human labor, the good news is that output per person rises. The bad news is that inequality worsens, for several reasons. First, robots increase the supply of total effective (workers plus robots) labor, which drives down wages in a market-driven economy. Second, because it is now profitable to invest in robots, there is a shift away from investment in traditional capital, such as buildings and conventional machinery. This further lowers the demand for those who work with that traditional capital.

But this is just the beginning. Both the good and bad news intensify over time. As the stock of robots increases, so does the return on traditional capital (warehouses are more useful with robot shelf stockers). Eventually, therefore, traditional investment picks up too. This in turn keeps robots productive, even as the stock of robots continues to grow. Over time, the two types of capital grow together until they increasingly dominate the entire economy. All this traditional and robot capital, with diminishing help from labor, produces more and more output. And robots are not expected to consume, just produce (though the science fiction literature is ambiguous about this!). So there is more and more output to be shared among actual people.

However, wages fall, not just in relative terms but absolutely, even as output grows.

This may sound odd, or even paradoxical. Some economists talk about the fallacy of technology fearmongers’ failure to realize that markets will clear: demand will rise to meet the higher supply of goods produced by the better technology, and workers will find new jobs. There is no such fallacy here: in our simple model economy, we assume away unemployment and other complications: wages adjust to clear the labor market.

So how can we explain the fall in wages coinciding with the growing output? To put it another way, who buys all the higher output? The owners of capital do. In the short run, higher investment more than counterbalances any temporary decline in consumption. In the long run, the share of capital owners in the growing pie—and their consumption spending—is itself growing. With falling wages and rising capital stocks, (human) labor become a smaller and smaller part of the economy. (In the limiting case of perfect substitutability, the wage share goes to zero.) Thomas Piketty has reminded us that the capital share is a basic determinant of income distribution. Capital is already much more unevenly distributed than income in all countries. The introduction of robots would drive up the capital share indefinitely, so the income distribution would tend to grow ever more uneven.

The only difference in the second case (in which robots and human labor are close but not perfect substitutes) is that wages eventually rise (after, say, 20 years, when the productivity effect outweighs the substitution effect)—but by then it’s too late (as capital continues to have a higher share of income, although not as much as in the first case). And, in the third case, the growing gap between labor and capital (as in the other models) is exacerbated by growing inequality between skilled and unskilled workers.

In all three versions of the model, then, most of the income goes to owners of capital (and, in the third version, to skilled workers who cannot easily be replaced by robots). The rest get low wages and a shrinking share of the economic pie.

And the authors’ conclusion?

We have implicitly assumed so far that income from capital remains highly unequally distributed. But the increase in overall output per person implies that everyone could be better off if income from capital is redistributed. The advantages of a basic income financed by capital taxation become obvious. Of course, globalization and technological innovation have made it, if anything, easier for capital to flee taxation in recent decades. Our analysis thus adds urgency to the question “Who will own the robots?”

The assumption about the unequal distribution of capital income is, in fact, the appropriate one for the existing set of economic institutions. As the authors understand, the only way to change their dystopian prognosis is to fundamentally change the distribution of capital income.

And, if we’re going to be honest, the only way to do that is to eliminate the private ownership of the robots and the rest of capital.

 

*The model is also based on the presumption that all markets, including the labor market, clear, that is, they assume away unemployment and other such “complications,” which turns out to give those who deny the negative effects of robots and automation their strongest possible case.

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Greg Ip would like us to believe that, right now, in labor versus capital, labor is winning.

Really?!

That’s certainly not the case if we actually look at the official data on the wage share of U.S. national income.* As it turns out, the share of income going to workers has fallen from a high of 51.5 percent (in both 1953 and 1970) to a low of 42.2 percent (in 2013), with a slight uptick to 42.9 percent (in 2015).

Clearly, even with recent increases in real wages, labor has not been winning in its war with capital.

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So, how does Ip get his result, showing very little trend in labor’s share of national income? Well, by changing the facts. First, he subtracts capital depreciation from national income (and calls that, incorrectly, net national income).**

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OK, let’s do that—and much the same result as at the top of the post emerges: a long-term decline in the wage share (from 69 percent in 1982 to a low of 60 percent in 2012-14).

That means Ip’s surprising (and ultimately deceptive) result actually relies on his second modification: taking out rental income. Clearly here he is on shakier ground: rental income is mostly another form of the return on capital, distributed not to “households,” but to the owners of most of the buildings and land (both residential and corporate) in the U.S. economy. It’s just another distribution of the surplus to those at the top, which is a key component of both national income and capital’s share.

So, no, labor’s share is not back to where it was prior to the crash of 2007-08. And even if it’s moving in that direction, it’s well below its postwar peaks.

Capital is still winning its war against labor.

 

*And, remember, my preference is to subtract CEO and other 1-percent “wages” (and add them to capital’s share) to get the real wage share.

**By rights, he should subtract all capital expenditures (not just depreciation) to obtain net national income, that is, new value added. Then, we’d be left with the three components of the infamous Trinity Formula—wages, profit, and rent—all of which are created by the labor of the working-class.

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It is interesting that, on the surface (but, as I explain below, only on the surface), neither major political party on either side of the pond seems to be making the claim they’re the “party of business.” Not the Conservative and Labor Parties in the United Kingdom, or the Republican and Democratic Parties in the United States.

Here’s Chris Dillow on the situation across the pond:

What I mean is that back then, the Tories were emphatically on the side of business, exemplified by Thatcher’s union-bashing and talk of “management’s right to manage”. In the 90s Labour – first under John Smith and then under Blair – devoted immense effort to trying to get business onside via the prawn cocktail offensive.

Elections then were won and lost by chasing the business vote.

Things have changed. In taking the UK out of the EU against the wishes of most major companies, the Tories can no longer claim to be the party of business. And Theresa May’s talk of getting “tough on irresponsible behaviour in big business” and of “unscrupulous bosses” suggests little desire to become so.

You might think this presents Labour with an open goal. It would be easy to present policies such as a national investment bank, more infrastructure spending and anti-austerity as being pro-business.

But there seems little desire to do this.

Something similar is going on in the United States. Neither major party political candidates embraced business during the nominating campaigns or their conventions.

In fact, in his acceptance speech, Donald Trump lambasted big business for supporting his opponent:

Big business, elite media and major donors are lining up behind the campaign of my opponent because they know she will keep our rigged system in place. They are throwing money at her because they have total control over everything she does. She is their puppet, and they pull the strings.

While, last Thursday, Hillary Clinton vowed to overturn Citizens United and challenge key corporate decisions:

That’s why we need to appoint Supreme Court justices who will get money out of politics and expand voting rights, not restrict them. And if necessary we’ll pass a constitutional amendment to overturn Citizens United!

I believe American corporations that have gotten so much from our country should be just as patriotic in return. Many of them are. But too many aren’t. It’s wrong to take tax breaks with one hand and give out pink slips with the other.

Both parties, it seems, are trying to court voters who are fed up with business as usual.

But, as I see it, that’s only what’s happening on the surface. None of the four parties is making a claim to be the “party of business” because, below the surface, all four are the parties of business.

What I mean by that is that the common sense of all four parties is the promise to promote faster economic growth and create more jobs and, in the absence of alternatives (such as direct government employment or worker-owned enterprises), that means creating a business-friendly economic and social environment.

Now, the parties may differ about how to create such an environment (e.g., in the United States, lowering individual and corporate income taxes versus using nonprofit foundation contacts to arrange business investments). But they agree on the goal: it’s up to the government to create the conditions for private corporations to use their profits to foster economic growth and job creation.

The result is that, in the current climate—with flat or falling incomes and grotesque levels of inequality—none of the parties wants to openly declare itself the “party of business.” But, they don’t have to, because they are already—all four of them—the parties of business.