Misperceptions and Flawed Metaphors in Economic Theory

Posted on December 28 2012 10:31 PM by John Atten in   ||   Comments (2)

I would make clear before I proceed that I am attempting to create a rational examination of the authors points from my own perspective. Like Mr. Cain, I am far from an economist or a study of political science, and I may well lack critical information here. I also want to make clear that I ultimately respect Mr. Cain’s opinions. Where I disagree, I am completely open to discussion and enlightenment. This post should be read from the perspective of a rational and respectful debate, rather than an ideological monologue. I imagine Mr. Cain and I could have a very interesting discussion over coffee, and both emerge the better for it.

I recently read a fascinating blog post which undertakes to describe author Caleb Crain’s understanding of predominant metaphors and concepts used to describe the American economy of the past century. That post can be found here, and it is an interesting read:

Debtmageddon vs. The Robot Utopia

Topics within this post, in order for easier navigation:

 

(image by Quin.Anya attribution-ShareAlike)

Washington on BillThe ultimate point of the author’s work appears to be that, through increasing computerization and automation, society will (has?) create(d) an economic engine dependent primarily upon machines, with little meaningful production from human power beyond building, operating, and maintaining the machines which produce the bulk of our economic output. Oh, and that the owners of such machines will realize most of the revenue and profit to be had. The author uses this scenario to make the case for Democratic Socialism and wealth re-distribution as the only effective mechanism for society to function within these constraints.

Mr. Crain’s theories about the “Robot Utopia” (or dystopia, as the case may be) is not where I take exception with the article. Also, I am not here to argue for or against any one economic or political system. Where I take exception, and would offer some constructive criticism of the author’s work, is in his presentation of flawed metaphors and concept to set the stage for his proposal that wealth redistribution and Democratic Socialism is the only logical conclusion to the story.

The Author’s Flawed Presentation of the Family Economic Metaphor

Most people make a natural comparison between a nation's budget and a family's. If a family is sliding into debt, the only remedies are to earn more and spend less.

Note the use of the term “family budget” in the above quote. It is this which which is the important concept, as we shall see shortly. Crain takes up the economic metaphor of the family budget commonly employed to describe proposed solutions to our economic woes, and calls it . . . flawed. The author counters with this seemingly sensible argument:

But a nation's economy is not at all like a family's. For one thing, within most families, communism prevails: the rule governing money is, From each according to his abilities, to each according to his needs. For better or worse, this doesn't happen to be the rule governing money in America at large. Also, within most families, money is not exchanged for labor.

This is so true. Within the micro economy that is the typical American family, one might say that some form of “communism” prevails. However, Mr. Crain undermines his argument with the very next statement:

“. . . In a pedagogical, largely symbolic way, Jimmy may be given $2 a week in exchange for taking out the garbage. But the person who cooks and cleans does not clock his hours; the children do not buy their dinners. The exchange of labor and goods within a family is for the most part unmeasured and invisible, and it makes more sense to understand a family as a group of people functioning [as] a single economic agent.” [emphasis mine]

Outlays-and-Revenues-from-1930-to-20121Mr. Crain’s attempt to nullify the metaphor of the family budget-style economic prescription is invalid. Even communist countries, and the families within them, must have a budget, and exist within the restrictions of that budget. The author attempts to compare the micro-economic activity within a family unit with the macro-economic activity in which the family, as whole, participates. Also, note for later that within said family, there is a familiar central planning authority - namely, the parents. Yes, communism has been shown to work on a micro scale, within families, and within larger agricultural collectives. It has also been shown to fail miserably as a macro-economic model at the national level, especially as societies move beyond agriculture into mechanized and militarized police states. That central planning authority doesn’t work with nations. But I digress.

The idea that a nation, any nation, must exist within budget constraints which include revenue, expenses, and debt is 100% valid. And when the combination of expenses and debt-service payments exceed that nation’s ability to pay, expenses must be reduced, and/or revenue must go up. Which leads us to the next point, on which the author and I agree in substance, but for which again, the author makes a logically flawed argument and thus weakens his larger position.

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Trickle-Down, or “Voodoo” Economics

Ronald_Reagan_televised_address_from_the_Oval_Office,_outlining_plan_for_Tax_Reduction_Legislation_July_1981A favorite of the American Republican party, Trickle-Down economics, or Supply-Side economics, is a largely political (rather than economic) idea which proposes that tax benefits or other economic incentives provided by government to businesses and the wealthy will spur economic investment, job creation, and overall economic growth. While there are numerous arguments against this so-called theory, the author once again attempts to use the micro-economic situation within a family to illustrate why the idea fails within a national economy. He is correct in pointing out that there is no real point of comparison here. But that, in essence, is the problem. There is not a valid point of comparison, and the author expends a longish paragraph describing why.

Proponents of trickle-downism will argue that the little-taxed corporate executive will in fact share his wealth by spending it, and that his purchase of goods and services will drive economic growth more efficaciously than mere giveaways would. But it turns out that the executive doesn't spend more, or not enough more for his increased spending to be helpful to the economy—for the simple reason that he doesn't need to. In the hands of rich people, money moves slowly.

Ahhh, Now HERE the author approaches the real reason why trickle-down/”supply-side” economics fails. What economists would call the “Marginal Propensity to Save.” When all of your needs are met, as well as the bulk of your “wants",” it makes more sense to sock that money away. If you own a business, your argument might go like this:

Government: “We’ll give you a real big break on your taxes. You pay nothing in taxes this year. Are you going to hire more people?”

Business Owner: “Don’t think so, unless my business grows. My current crew is keeping up with demand at the moment.”

Government: “Will you increase pay?”

Business Owner: “I do my best to pay a fair wage, based on what the market will bear, and employee merit.”

While there is a case to be made that tax breaks might allow for expansion into new markets, or of existing product lines, I think we can count on the idea that if business sees a profit in either of these areas, the expansion will occur with or without tax breaks. You know, because of the profit. If tax breaks are necessary in order for the move to be profitable, then possibly we need to examine the tax structure as a whole, and not just for this business.

While it is certainly true that individuals and corporations do in fact invest (even putting money into a savings account is a form of investing), which creates desirable economic activity, the economic disparity between the wealthiest among us and the rest of us grows faster under these conditions. Investment in potential job-creating activity, while most definitely a part of the process, is an inherently more risky thing than investing in a blue-chip stock. As an example, examine the trend in relative compensation of corporate executives compared to middle-class workers over the past three decades. Trickle-down economics tends to target benefits toward a certain group, instead of spreading economic benefit and liability equally across all.

US_high-income_effective_tax_ratesThe economic iniquity we see in American society today is growing at an alarming rate. Most likely, this represents the growing influence of moneyed interests in our political system, and the continuing perforation of our tax code. I suspect we are approaching a breaking point, in which the 24 hour news cycle and the internet propaganda machine

As importantly, levying taxes as an equal fraction of everyone’s income above and beyond the poverty line, and doing so at a level which is adequate to provide for the costs of running the country and service the debt is inherently more fair. The discussion of what costs are incurred, and the level of debt which should be allowed, are a different discussion, beyond the scope of this post.

I realize I am over-simplifying the situation here, and I am by no means attempting to take up a debate about Supply-Side economic theory itself (I lack the education and knowledge to do so). However, my point is that, the author and I agree that trickle-down economic theory is inherently flawed.

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Economic Prosperity in America Following WWII

Women WeldersPerhaps my biggest complaint with Caleb Crain’s arguments lies in his proposal that the economic prosperity in America following World War II arose from some magical re-distribution of wealth within the American economy as a result of the war itself. From Mr. Cain’s post:

What if it wasn't the deficit spending of World War II that stimulated the American economy, but the war's redistribution of wealth? The war obliged America to employ a literal army of people as soldiers and factory workers, and after the war, America felt obliged to continue to reward the working classes with expanded social services, including free higher education for veterans.

This much is true. The war itself caused massive employment, both domestically, and with an immense increase in armed forces enlistment. No doubt, America’s entry into WWII caused a gigantic stimulus to the previously flagging economy. But it is the author’s next statement which falls short of the true mark:

The period from World War II to the 1970s turned out to be the greatest era of prosperity America has ever known. Is it a coincidence that it followed a massive, government-run redistribution of wealth, which happened to take the form of a war?

The war itself was most definitely a contributing factor, but not so much in the way the author suggests. Think about it - the wealth re-distribution (if you really need to call it that) achieved by paying the soldiers, and the women and others who assumed the previously male-dominated factory jobs for the course of the war, would soon end with the conclusion of the war. Granted, the increase in industrial capacity, and the massive production effort needed to sustain the war effort helped kick the economy into gear, but these things merely set the stage for the real reason America emerged from WWII into what “turned out to be the greatest era of prosperity America has ever known.”

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America the Post-War Monopoly

Mr. Crain correctly notes that America was exceptionally prosperous in the post war years, through most of the 1970’s. However, he attempts to attribute this to the stimulus effect of wartime spending, and some sort of socio-economic engineering on the part of the federal government. The reality is quite different.

Bundesarchiv_B_145_Bild-P054320,_Berlin,_Brandenburger_Tor_und_Pariser_PlatzDuring the period from WWII through the 1970’s, America was dominant in nearly every sector of manufacturing. Why? Because the manufacturing capabilities of most of America’s potential competition were in ruins. Japan. Germany. England, France. The Soviet Union. While some were allies, and some were vanquished enemies, most of these nation’s suffered enormous damage to industrial production capacity as a result of the war, whereas America was left with a surplus of factories previously devoted specifically to feeding the national war effort (and to no small degree, that of our allies, as well).

As a side benefit, one of the “spoils” of war was an infusion (in many cases, of dubious ethical standing) of refugee Nazi scientists and engineers fleeing Nazi Europe for fear of becoming guests of the Russians.

In the years following World War II, while the rest of the Western world was struggling to rebuild shattered infrastructure and production capacity, America was enjoying a near-monopoly on manufacturing, and technological innovation.

At the conclusion of World War II America was blessed with conditions perfect for her rise as a the pre-eminent economic force in the post-war world, and she benefitted from this for several decades. While the war itself may have had some stimulating economic effect, the prosperity of the decades following WWII was far more about the incapacitated economic state of the other participant nations at war’s end.

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Why haven't our current wars had the same effect that World War II did?

This is the question posed by Caleb Crain as he leads us to the central tenet of his article, and he makes no claim to know an answer to this question, though he mentions the US possibly “not paying soldiers enough” and the possibility that the military’s investment in technology and equipment has muted war’s impact as a redistributor of wealth. To this I say, war is NOT an effective “redistributor of wealth” within a nation, although possibly, wealth is redistributed from the vanquished nation to the victor. In any case, the only redistribution of wealth in modern brush wars seems to be from the taxpayer to the defense contracting industry.

I suspect, in light of my forgoing argument that America’s economic prosperity resulted from the devastation of most of the rest of the world’s modern production capacity, that you know where I am going with this.

F-117The wars (or “police actions'” or “conflicts”) in which America participated after WWII were an entirely different kind of conflict, and bear no comparison to the second world war. Yes, the government did spend tax dollars and create additional debt to fund those wars. But for the most part, these conflicts began and ended as proxy conflicts in third-world countries. At war’s end, the US had expended great capital, and possibly created a handful of jobs in the defense contracting industry, but in the meantime, other countries around the world (such as Germany, Japan, and China), unencumbered by international conflicts, continued to pump out products, and build/rebuild manufacturing infrastructure.

Indeed, it would seem that US military engagements in the years since WWII appear to be the fulfillment of Dwight D. Eisenhower’s prophetic warning about the dangers of the “Military/Industrial Complex",” creating wealth building opportunity for large defense contractors at the expense of the American taxpayer, and American soldier’s lives. Not to mention the apparent influence of the defense industry upon our policy-makers.

In point of fact, one could argue that the “stimulus” affect of such government spending and debt creation is demonstrated, in the form of these lesser conflicts, to be ineffective as a long-term economic solution. As I write this little missive, we have been embroiled in various parts of the Middle East and Afghanistan for most of the previous decade. To what economic result?

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The Robot Utopia: The Arguments Do Not Support the Thesis

In making his ultimate point, Mr. Crain presents a dual notion, the first part of which is intriguing (and definitely something for economists to ponder), and the second part of which he spends most of the article trying to support, and in my view fails.

Thanks in large part to computerized mechanization, manufacturing productivity in the past century has increased many times over. Standards of living are higher than they ever were, but we no longer need as many humans to work as we once did. Perhaps not coincidentally, human wages, in America at least, have stagnated since the 1970s. If humans made no more money in the past four decades, where did the wealth created by the higher productivity go? Toward robot wages, as it were. The owners of the robots took the money—that is, the capitalists.

Above is the first part of the author’s final premise, which is most definitely food for thought. What happens when a society is sufficiently automated such that fewer and fewer actual workers are needed? This is potentially rich soil for thought. However, I suspect that people have had this concern since the first tools were invented, and especially when the industrial age began. New jobs will be invented to support new technologies, and new technologies will continue to spawn new work which needs to be done.

robots

After all, while buggy whip makers were sadly and tragically displaced by the invention of the automobile, the economy did not collapse. In fact, new and fantastic opportunities arose in the form of interstate transportation, automobile service, and automobile manufacturing. Likewise, the age of the personal computer has eliminated typing pools and decimated the slide rule manufacturing sector, but has spawned an enormous industry around software development. And so on.

At some point society has to choose. Either society accepts the robots' gift as a general one, and redistributes the wealth that the robots inadvertently concentrate, or society allows the robots to become the exclusive tools of an ever-shrinking elite, increasingly resented, in confused fashion, by the people whom the robots have displaced.

You might compare the political challenge they represent to what's known as the "resource curse"—the infamous difficulty that oil-rich nations have in preserving democracy while sharing the oil's proceeds. Do we want to be Norway or Saudi Arabia? The choice seems to be between democratic socialism and tyranny

And that is the final part of the author’s conclusion. I contend that such is not the choice, or at least, not the only choice. More importantly, the author appears to lead the reader to this binary option through the previously examined arguments about wealth redistribution, which for myself, anyway, I feel are deeply flawed, and lacking in factual support in the real world.

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predatordrone-cropped-proto-custom_28

The Relative Ease of Successive Generations

Author Crain’s expression of the Robot Utopia has been expressed similarly in the past. Though the degree of paranoia may vary, each technological innovation brings with it some fear of ultimate catastrophic impact. Hell, I remember my mother, on seeing her first digital clock, saying “gosh, if everybody has those, no one will be able to tell time anymore".” No, really. She felt that way, and was concerned.

As humankind continues to automate areas of manufacturing and other repetitive or unpleasant segments of the economy, the economic landscape will change, and our socio-political systems along with it. America, in particular, has felt for numerous generations that we are somehow entitled to be the economic center of the universe. Now, as an American, I find this idea seductive, and I would that my country remain at the top of its game. However, the reality is that great economies rise and fall, expand and contract. The void left by one will be filled by another, guaranteed. Political and economic systems are nothing but models, created around sets of ideals. In general, the ideals which form the basis for those models regularly exceed our limited human capacity to fulfill, and the result is the model breaks down.

I truly enjoyed reading Caleb Crain’s article, and while I find fault with some of his arguments, he makes interesting and though-provoking points nonetheless. What do YOU think?

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Posted on December 28 2012 10:31 PM by John Atten     

Comments (2)

Comments (2) -

The Arthurian
The Arthurian
12/29/2012 5:31:43 PM #

Smile  My son came home from high school one day and said he didn't know which way "clockwise" was -- thanks to those digital clocks that bothered your mother.

Hey, I like your stuff. Came to your site from Reddit Economy

"Economic Prosperity in America Following WWII"

Excellent. Too many people fail to examine the *good* years. So, how can they understand what it will take to make the economy good again???

"The war itself was most definitely a contributing factor, but not so much in the way the author suggests. Think about it - the wealth re-distribution (if you really need to call it that) achieved by paying the soldiers, and the women and others who assumed the previously male-dominated factory jobs for the course of the war, would soon end..."

Yes, indeed. And the right answer must be one for which the "good stuff" doesn't end until the economy starts going bad, say in the 1970s.

"Why haven't our current wars had the same effect that World War II did? This is the question posed by Caleb Crain as he leads us to the central tenet of his article, and he makes no claim to know an answer..."

Oh, but the answer is so simple! After WWII the vast bulk of private debt (debt that had caused the Great Depression) was gone. With that burden lifted, people were again willing to spend, and borrow and spend; and this spending was the source of economic growth.

This, combined with the demand of rebuilding nations that you point out, was the source of U.S. economic growth until (1) the other nations rebuilt, and (2) the cost of our accumulating debt reduced profits and demand domestically.

"I would that my country remain at the top of its game. However, the reality is that great economies rise and fall, expand and contract. The void left by one will be filled by another, guaranteed."

Amen to that.

Art
The New Arthurian Economics
http://newarthurianeconomics.blogspot.com/

jatten
jatten
12/29/2012 9:00:58 PM #

Thanks for reading!

I like your point about private debt post WWII. WOuldn't even have thought of it myself, but well said!

I didn't go into it in the article, but the other big (biggest?) problem in today's economy (within my limited, no-college-having understanding) is what I call the "Scam of the Federal Reserve Banking System."

If you haven't already, grab a copy of "The creature From Jekyll Island" by G. Edward Griffin. While the author steps awfully close to full-blown, centuries-old conspiracy theory (I get a little disinterested when they become TOO fantastical with that stuff), he also does a very good job of laying out the central banking mechanism, and how we are all being bilked.

Thanks for taking the time to comment. I will be checking out your link to see what is up with the New Arthurian Economics!

-John

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About the author

My name is John Atten, and my "handle" on many of my online accounts is xivSolutions. I am Fascinated by all things technology and software development. I work mostly with C#, JavaScript/Node, and databases of many flavors. Actively learning always. I dig web development. I am always looking for new information, and value your feedback (especially where I got something wrong!). You can email me at:

jatten at typecastexception dot com

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