Posts Tagged ‘markets’

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Finally, after years of near-orgiastic celebrations of the internet of things—including, of course, Jeremy Rifkin’s extravagant claim that it would move us beyond capitalism and usher in the “democratization of economic life”—commentators are beginning to question some of its key assumptions and effects. What they have discovered is that the internet of things is, “in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties.”

Nathan Heller, for example, finds that, while the gig economy can make life easier and more financially rewarding for many “creative, affluent professionals,” it often has negative effects on those who do the actual work:

A service like Uber benefits the rider, who’s saving on the taxi fare she might otherwise pay, but makes drivers’ earnings less stable. Airbnb has made travel more affordable for people who wince at the bill of a decent hotel, yet it also means that tourism spending doesn’t make its way directly to the usual armies of full-time employees: housekeepers, bellhops, cooks.

On top of that, the fact that the so-called sharing economy has become a liberal beacon (including, as Heller makes clear, among many Democratic activists and strategists) has meant the displacing of “commonweal projects that used to be the pride of progressivism” by acts of individual internet-based exchange.

Perhaps even more important (or at least more unexpected and therefore more interesting), Adam Greenfield focuses on the problematic philosophical assumptions embedded in the ideology of the internet of things.

The strongest and most explicit articulation of this ideology in the definition of a smart city has been offered by the house journal of the engineering company Siemens: “Several decades from now, cities will have countless autonomous, intelligently functioning IT systems that will have perfect knowledge of users’ habits and energy consumption, and provide optimum service … The goal of such a city is to optimally regulate and control resources by means of autonomous IT systems.”

There is a clear philosophical position, even a worldview, behind all of this: that the world is in principle perfectly knowable, its contents enumerable and their relations capable of being meaningfully encoded in a technical system, without bias or distortion. As applied to the affairs of cities, this is effectively an argument that there is one and only one correct solution to each identified need; that this solution can be arrived at algorithmically, via the operations of a technical system furnished with the proper inputs; and that this solution is something that can be encoded in public policy, without distortion. (Left unstated, but strongly implicit, is the presumption that whatever policies are arrived at in this way will be applied transparently, dispassionately and in a manner free from politics.)

As Greenfield explains, “Every aspect of this argument is questionable,” starting with the idea that everything—from users’ habits to energy consumption— is perfectly knowable.

Because that’s the promise of the internet of things (including the gig economy): that what individuals want and do and how the system itself operates can be correctly monitored and measured—and the resulting information utilized to “provide optimum service.” The presumption is there are no inherent biases in the monitoring and measuring, and no need for collective deliberation about how to solve individual and social problems.

The ideology of the internet of things is shorn of everything we’ve learned about both epistemology (that knowledges are constructed, and different standpoints participate in constructing those knowledges differently) and economic and social life (that the different ways the surplus is produced and distributed affect not only the economy but also the larger social order).

It seems the conventional ways of thinking about the internet of things are merely an extension of mainstream economists’ ways of theorizing the world of commodity exchange, allowing a definite social relation to assume the fantastic form of a relation between things.

That’s where metaphysics and theology leave off and the critique of political economy begins.

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The stock-in-trade of neoclassical economists, like Harvard’s Gregory Mankiw, is that free markets are the most efficient way of allocating scarce resources. Therefore, they spend a great deal of time celebrating free markets, and criticizing any kind of regulation of or intervention into markets.

Rent control is a good example, one that is taught to thousands of undergraduate students every semester. According to Mankiw, when governments establish price ceilings on rental housing, they cause a shortage of rental units. In the short run (as in the chart on the left above), when the supply of rental housing is fixed, the shortage may be relatively small. But in the long run (as in the chart on the right above), when both the supply of and the demand for rental housing are more “elastic” (that is, more sensitive to changes in price), the shortage grows.

When rent control creates shortages and waiting lists, landlords lose their incentive to respond to tenants’ concerns. Why should a landlord spend money to maintain and improve the property when people are waiting to get in as it is? In the end, tenants get lower rents, but they also get lower-quality housing. . .

In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.

That’s the world according to neoclassical economic theory. And in reality?

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Philadelphia, the City of Brotherly Love—aka the nation’s poorest big city, and among the most racially segregated—according to Caitlin McCabe [ht: ja], “is increasingly becoming a renter’s haven.”

But what happens when too many renters, many of them higher-income, flood the market?

In cities such as Philadelphia, lower-income residents feel the squeeze. And it could be getting worse for them

A new study by the Federal Reserve Bank of Philadelphia shows that, as a result of gentrification, Philadelphia lost one-fifth of its low-cost rental-housing stock—more than 23,000 units renting for $750 a month or less—between 2000 and 2014.

Even more, the study found, the affordable housing that remains in the city is in danger, too—

since 20 percent of the city’s federally subsidized rental units will see their affordability restriction periods expire within the next five years. Of these rental units, more than 2,300 are in gentrifying neighborhoods.

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The short-term result of gentrification and the loss of low-cost rental housing is that Philadelphia is now the fifteenth-most-expensive rental city in the nation, with a median rent (for a one-bedroom apartment) of $1,400. In the long run, the shrinking stock of affordable housing leaves lower-income renters saddled with higher rent burdens, greater financial distress, and insecure housing arrangements, which combine to reinforce residential patterns that are already highly segregated by income and socioeconomic status.

As the Philadelphia Fed explains,

The pockets of gentrification in Philadelphia appear to reinforce these patterns in several ways. First, gentrifying neighborhoods become less accessible to lower-income movers, limiting their housing search to more distressed and less central neighborhoods. Vulnerable residents who remain in these upgrading neighborhoods often face higher housing costs and are less likely to see improvements in their financial health. In addition, vulnerable residents in neighborhoods that are in more advanced stages of gentrification may even become more likely to move out of these neighborhoods. Each of these consequences of gentrification reflects the impact of increasingly burdensome housing costs, driven by losses of both low-cost rental units and units with subsidized affordability.

The market for rental housing in Philadelphia is increasingly becoming a neoclassical economist’s dream—but a nightmare for low-income renters in the City of Brotherly Love.

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René Magritte, “La clef des champs” (1936)

Plenty of illusions are being shattered these days, such as the idea that a successful recovery from the worst economic downturn since the Great Depression would keep the incumbents in power. A combination of lost jobs, stagnant wages, and soaring inequality put an end to that illusion. Much the same has happened to American Exceptionalism.

Noah Smith has just discovered another shattered illusion: the independence of supply and demand.

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Mainstream economists generally think about the world in terms of supply and demand—at both the micro and macro levels: supply and demand in the market for oranges or labor (which determine the equilibrium price and quantity), as well as aggregate supply and demand for the economy as a whole (which determine the equilibrium level of prices and output). Perhaps even more important, they think about supply and demand as acting independently of one another: a shift in supply or demand in individual markets (which lead to changes in equilibrium prices and quantities) as well as “shocks” to aggregate supply or demand in macro models (which determine changes in the equilibrium level of prices and output). The presumption is that a shift in demand (at the level of individual markets or the economy as a whole) does not cause a shift in supply (at either level), or vice versa.*

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As it turns out, the independence of supply and demand is just an illusion.

As I wrote back in 2009, it’s quite possible that at the micro level—for example, in the case of the labor market—both supply and demand are determined by something else, such as the accumulation of capital.

Thus. . .if the accumulation of capital leads to rightward shifts in both the demand for and supply of labor, wages may not increase (and quite possibly will decrease).

Therefore, supply and demand in individual markets aren’t necessarily independent.

And then, in 2013, I discussed the illusion of the independence of aggregate supply and demand.

In terms of the mainstream model, the collapse of aggregate demand leading to the crash of 2007-08 has also affected the aggregate supply of the economy—thereby shattering the illusion of the independence of the two sides of the macroeconomy. As the authors put it, “a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions.”

Not only does the destruction of a significant portion of the future growth potential of the U.S. economy challenge the model mainstream economists use to analyze the macroeconomy and to formulate policy; it also forces us to question the rationality of a set of economic arrangements in which trillions of dollars of potential wealth (which might then be used to improve lives for the majority of the population) are sacrificed at the altar of keeping things pretty much as they are.

It represents the indictment both of an academic discipline and of economic system.

So, Smith is right: the shattering of the illusion of the independence of supply and demand means the way mainstream economists teach basic economics is fundamentally wrong.

What he forgets to mention, however, is that an economic system that is governed by supply and demand that are not independent of one another—and thus is subject to considerable instability on a regular basis, with the costs being shouldered by those who can least afford it—is also open to question.

Perhaps Tuesday’s results will serve notice that the time for challenging mainstream economics and the economic and social system celebrated by mainstream economists has finally arrived.

 

*There can, of course, be simultaneous shifts in supply and demand but the shifts themselves are considered independent of one another.