“contrary to claims there is no body of work to challenge neo-classical economics”

I think the point you’re failing to grasp is that there’s nobody *who matters* to challenge the orthodoxy, at least on the left.

It’s gonna be bloody hard for Labour to challenge any kind of economic orthodoxy in opposition. The next economic settlement will be written by the Conservative Party.

It surely makes sense, then, to look rather more closely where they’ll be getting their ideas from.

There’s also no-one with credibility to challenge neo-classical economics, normally because their unusual models tend to coincidentally yield results that accord precisely with their political views. Call them post-Keynesians or call them Austrian School economists, but their ridiculously ideological abuse of theory is always obvious.

has the “neoliberal paradigm” held sway across the world for the last 800 years?

what on earth makes you think that a methodological shift – for example, from rational-expectations equilibrium models, to computable agent-based modeling (the Sante Fe crowd) – is going to yield policy lessons more to your liking?

“There’s also no-one with credibility to challenge neo-classical economics, normally because their unusual models tend to coincidentally yield results that accord precisely with their political views. Call them post-Keynesians or call them Austrian School economists, but their ridiculously ideological abuse of theory is always obvious.”

Mmhmm.

The argument “some economic models coincidentally yield results that accord precisely with the political views of their supporters” is a curious one to use *in defence of* neo-classical economics.

These guys deserve a mention: http://www.paecon.net/

Rowan Williams? God help us…

This must be article #5244347 on the topic of “we must have a new road map” without saying anything about what such a map might look like. Other than it must not be “neo-liberal”. Whatever it is, it mus not be that.

If you believe that there is any map which will perpetully allow you to avoid ditches then you are fooling yourself. There is, there can not be, such a thing as risk-free progress. You cannot have a map of the future. You can opt for stasis, but progress involves risk.

No one has said progress doesn’t involve risk, cjcjc, but our current ‘road map’, if you like, is not progressive. Actually if you listen to Paul Krugman, since the 1980s, it has had consistently diminishing returns for most of us. Not to mention that it has failed to deliver on key public services, and on an economic model that provides a decent wage for all those employed, never mind those who are unemployed.

So progress, yes, risk, yes – but none of that is an argument against the search for a different road map.

Firstly, it is misleading in the extreme to suggest that we have no road map for the financial crisis or only a map that is 40 years out of date.

Here is a personal modest selection of recent relavent literature about depression road maps:

Randall Parker: A Twenty-First Century Look Back at the Economics of the Interwar Era (Edward Elgar 2007) – with a collection of interview transcripts of conversations with leading researchers into the economics of the depression of the 1930s.

BS Benanke (now chairman of the Board of Governors of the US Federal Reserve Bank): Essays on the Great Depression (Princeton UP, 2004)

Peter Temin: Lessons from the Great Depression (MIT Press, 1989)

Barry Eichengreen has written extensively on issues relating to the 1930s depression
http://www.econ.berkeley.edu/~eichengr/books.html

Robert Skidelsky: Keynes – The Return of the Master (Allen Lane 2009)
Try Paul Krugman’s review:
http://www.guardian.co.uk/books/2009/aug/30/keynes-return-master-robert-skidelsky

For accessible texts on macroeoconomics with a Keynesian flavour try:

Manfred Gartner: Macroeconomics (OUP, 3rd ed 2009)
Prof Gartner teaches at a Swiss university and policy issues provide the framework for this text.

Wendy Carlin and David Soskice: Macroeconomics (OUP 2005)

Why no mention of Noble Laureate Joe Stiglitz on: Whither Socialism? (MIT Press, 1996) – which has much to say on the causes of market failure?

This time is different – a comparison between the start of the 1930s depression and what happened this time:
http://krugman.blogs.nytimes.com/2009/11/03/the-story-so-far-in-one-picture/

For another bibliography on the crisis, try these suggested readings relating to the play: The Power of Yes, by David Hare, at the National Theatre:
http://www.nationaltheatre.org.uk/51316/related-items/the-power-of-yes-our-reading-suggestions.html

I am ambivalent over how successful macro-economics can be in light of the crisis but I think it is worth nothing Scot Sumner’s spirited defence of it here (and in other posts on that blog): http://blogsandwikis.bentley.edu/themoneyillusion/?p=2139

Essentially, he reckons the crisis (as opposed to an unavoidable downturn) wasn’t caused by anything other than the Feds forgetting a cardinal rule of pumping enough cash in to target Nominal GDP growth.

“Some like Richard Layard, Robert Skidelsky…”

You want to use Skidelsky as an “economist”? Oh come on, he’s a historian. Yes, he did a great biography of Keyens but all the economics he ever utters is straight from that biography: and sadly, he gets a lot of it wrong as well.

As for Layard being in opposition to “neo-liberalism” well, you’ve obviously not really understood much of what he’s been talking about over the decades.

This welfare reform stuff for example: Freud or whoever is pushing it politically now. You do know that the entirety of it is based on Layard’s theoretical work? And that Layard is fully in favour of such things as forcing (yes, forcing, via economics incentives) the long term unemployed into either training or make work schemes?

Just for giggle though: you do realise that a properly neo-liberal economic policy is to insist that there is no road map? That the future is unknowable and that thus our ideas of how to steer to the one we desire are futile?

“Some like Richard Layard, Robert Skidelsky…”

You want to use Skidelsky as an “economist”? Oh come on, he’s a historian. Yes, he did a great biography of Keyens but all the economics he ever utters is straight from that biography: and sadly, he gets a lot of it wrong as well.

As for Layard being in opposition to “neo-liberalism” well, you’ve obviously not really understood much of what he’s been talking about over the decades.

This welfare reform stuff for example: Freud or whoever is pushing it politically now. You do know that the entirety of it is based on Layard’s theoretical work? And that Layard is fully in favour of such things as forcing (yes, forcing, via economics incentives) the long term unemployed into either training or make work schemes?

Just for giggle though: you do realise that a properly neo-liberal economic policy is to insist that there is no road map? That the future is unknowable and that thus our ideas of how to steer to the one we desire are futile?

It is not as though we had no forewarnings of troubles to come in financial markets. The problem was that the warnings were studiously ignored by the authorities on both sides of the Atlantic – probably because of a pervasive uncritical faith in the self-correcting power of free markets coupled with a belief that that managers of financial institutions would act rationally to protect the interests of their shareholders.

If only we all had taken heed of this warning in 2003 from Warren Buffett about the inherent risks of the trade in derivatives:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

And this from 2002 about the inflating house-price bubble in Britain:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

Btw in case no one noticed, Keynes wasn’t an economist: he graduated in mathematics and never took a degree in economics, which may help to explain how he was able to think outside the box of orthodoxy which regarded persisting unemployment as a mere anomaly which could be corrected if only the workers accepted sufficiently large wage cuts to restore an equilibrium between demand and supply in the labour market – which seems to have been the position of Lionel Robbins of the LSE until the General Theory

In his seminal book, The General Theory . . (1936), Keynes wrote:

” . . in particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” [p.249]
http://homepage.newschool.edu/het//texts/keynes/gtcont.htm

Oh great, another leftwing blog which demonstrates no knowledge of economics, no understanding of what “neoliberalism” is (hence uterly inapropriate analogy with maps) and as usual offers zero concrete suggestions about what should acutally be done.

Godamn, comrades. We need to get economics degrees, cos we are collectively talking SHEEET

“Godamn, comrades. We need to get economics degrees, cos we are collectively talking SHEEET”

And so is the point of people like me proven.

I want the poor to be richer….just as many of you say you would like. I seem to be one of the few who are peddling the nostrums by which the poor have been becoming richer.

Yet I am derided as a “neo-liberal”.

Ho hum.

@10: “Essentially, he reckons the crisis (as opposed to an unavoidable downturn) wasn’t caused by anything other than the Feds forgetting a cardinal rule of pumping enough cash in to target Nominal GDP growth.”

I’m unconvinced that it was quite as simple as that. For one assessment of the cause(s) of the crisis, try Alan Greenspan’s testimony to the US House of Representatives Oversight Committee, as reported in the WSJ:
http://online.wsj.com/article/SB122476545437862295.html

For comparisons between this latest crisis and previous crises, try Carmen Reinhart and Kenneth Rogoff: This Time Is Different – Eight Centuries of Financial Folly (Princeton UP, 2009)

10.I am ambivalent over how successful macro-economics can be in light of the crisis

I have always been sceptical about it, on the grounds that it is hard to do experiments (and therefore easy to fool yourself). But thanks for the link.

In the meantime I would suggest paying attention to microeconomics, because we can do experiments and can therefore get some idea of what a microeconomic reform would look like.

Which leads me to conclude that the big issue for the next decade is going to be public sector productivity, and public sector reform. Anyone have any demonstrably successful ideas for that?

Tim,

On the point you make in your comment, you know full well that the important nexus comes at the issue of time-scales and issues of here-and-now inequality; yes, of course you are right that from a global, centuries-long perspective, capitalism has delivered enormous increases in the standard of living of the poorest, and is the only system of government and economic organisation which both breeds prosperity and tends to check authoritarianism.

Having said that, “neoliberalism” is not the same as “capitalism”, is it? Keynesianism was initially introduced as the saving economic remedy for liberal capitalist democracies which looked about to kick the bucket in the face of fascism and communism (what happened to it after that is a weird and wonderful story).

Where sensible leftists take issue with your side is on the levels of inequality currently tolerated, the recent trends towards greater absolute poverty, and the fact that things from these perspectives seem to either have gotten worse since the 1970s OR have not got better as fast as people think they should have done.

We can have senisble arguments about who is right and wrong, what is feasible and what is not.

Personally, i think I’m getting as sick to death as you are at the stream of “economic” raving from “the left” which operates at the level of an angry stoned 16 year old (I think of my former self here) ranting about “the evils of globalisation, Maaaan”.

The left needs more people with two things: 1) a sense of intellectual and political history, and 2) economics degrees.

Frustratingly, I lack 2). Most people on the left, it seems, lack both. And this is a problem, I think.

Actually, I technically don’t lack 2).

I often forget, I officially do have an economics degree.

Despite dropping the subject after my first year.

What a joke.

Paul – while globalisation has certainly hit some pretty hard barriers in some areas in the Middle East and Africa, I think there is still rather a lot of cause for optimism: http://www.ted.com/talks/alex_tabarrok_foresees_economic_growth.html

I am frankly astounded at some of the stuff people are doing in Eastern Europe in particular. New businesses being started despite the crisis, incredible levels of knowledge amongst young people. I mean, admittedly it does raise anxiety levels about us (as in UK) being rather left behind in the future, but in the grand scheme of things, it is all looking pretty good for humanity.

Also, I have brought this up before but no one here was really able to refute Will Wilkinson’s argument about economic inequality: http://www.cato.org/pub_display.php?pub_id=10351 . It isn’t anywhere near as bad as nominal figures might suggest and overall inequality might still be dropping even inside the years of neo-liberalism, partly because of the erosion of barriers to employment previously faced by women and minorities.

And, BTW, Paul, when you aren’t in “libertarians… eugh!” mode, you end up saying some pretty damn sensible things.

I’m not convinced this (economic flailing) is a lefty problem – there are plenty of rightwingers who sing the praises of capitalism while failing to acknowledge:

- how much it is propped up by govt regulation
- how many (most) of the theories espouse by Milton Friedman don’t work
- how their thoughts of what went wrong are dogmatic (see Nick above, citing another economist blaming the govt, and absolving those finance houses who packaged risk wrongly of blame).
- confuse corporatism with free market capitalism.

and on and on.

Personally, I’m intrigued by how behavioural economics mixes with traditional models, while looking to combine that with specific goals. And, of course, not paying less attention to GDP growth alone.

the OP however is about saying the left needs to find one – not point out what it is.

“Where sensible leftists take issue with your side is on the levels of inequality currently tolerated, the recent trends towards greater absolute poverty, and the fact that things from these perspectives seem to either have gotten worse since the 1970s”

Well this is an empirical question: has inequality risen? Has absolute poverty risen?

And let’s take that period since the 70s, (1980 as the starting point say?) as being exactly that period when “neo-liberalism” started its ascendancy.

(I have to admit to being terribly confused about what neo-liberalism is. It seems little more than a rag bag of whatever it is that people want to shout about. But that’s another matter.)

I agree that inequality within countries has increased over that time. And no, this doesn’t particularly worry me, for which those who do worry about inequality can rightly castigate me. The Swedish Gini has moved from something like .21/.22 out to .25. The British one is now around .34 I think or is it higher than that still? (These are post tax post benefit numbers. Sweden is .48 and UK .51 on market incomes.)

OK. Now has “absolute poverty” increased within countries over that time. No, absolutely not. If we take the global definition of absolute poverty, the $1 or $2 a day of the World Bank then of course no one in any western society has been on that for generations. If we take the UK’s own definition (less than 50% of 1997 (I think that’s the right year, might be 99) median income adjusted for inflation) then again, absolute poverty has been falling.

Now, as to inequality between countries. We have to decide how we’re going to measure this, do we use Milanovic’s Concept 1, 2 or 3? Do we measure inequality simply be taking the median of each country? In this case, then yes, inequality has risen. But this isn’t all that useful a measure. For the 900 million odd in Africa give us 52 data points this way, while the 2.5 billion in India and China give us only 2. So we might use Concept 2, which is to weight those national numbers by population. And by Concept 2 measures inequality has definitely been falling. No doubt about it at all as places like India, China, Indonesia, start running economies that generate hundreds of millions of newly middle class.

Concept 3 is a little more tricky, for here we’re trying to measure the entire global population as one. We’ve calculation problems. But yes, when India and China a roaring, then this too falls: when they stagnate (ie, India late 80s, early 90s before their first bolus of liberalisation) then it doesn’t.

So while you can say that inequality has been rising you can also say that it has been falling. My own opinion (not really buttressed by anything so boring as facts but there is a logic to it which I’ll explain another time) is that globalisation causes both the rise in within country inequality and the fall in global inequality. And I would also argue that for those who do worry about inequality then it’s the latter that should be the concern.

As to global absolute poverty we’ve got some interesting figures on that.

http://adamsmith.org/blog/international/so,-what%27s-it-all-about,-this-neo%11liberalism-stuff,-then?-200910264344/

” * Defining poverty as less than $1/day, world poverty rates fell by 80% from 27% in 1970 to slightly more than 5% in 2006.
* The corresponding total number of poor fell from 403 million in 1970 to 152 million in 2006.
* Similar findings apply if other poverty measures are used ($2/day, 5$/day, etc)”

If reducing poverty is the goal then it would seem that “neo-liberalism” has been woldly successful. Indeed, that’s the greatest reduction in poverty that we as a species have ever gone through.

“yes, of course you are right that from a global, centuries-long perspective, capitalism has delivered enormous increases in the standard of living of the poorest,”

This touches on something that Sunny mentions (which I’ll get to). I’ve several times in various bits and bobs of writing made the distinction between capitalism and markets. Capitalism is a description of the method of ownership of productive assets. Markets are a description of a method of exchange. They are absolutely not the same thing and it pains me to see people (the “right” is just as bad as the “left” in this sense) conflating the two. We can have capitalism without markets (in any sense of “free markets”) and arguable there are plenty of places that do. The Soviet Union could be described this way, with the State owning all the capital. Counties like Egypt, the Phillipines under Marcos, various forms of crony capitalism, of State protected monopolies and so on could be described this way. The results usually aren’t all that good.

But capitalist ownership isn’t necessary for markets to flourish: the Mondragon cooperatives, our own John Lewis, these are distinctly not capitalist entities competing in markets just fine thank you.

And if I were forced to choose, if I could only have one, then I would plump for the markets please and capitalism can go hang. I am, in this sense, more Hayekian than anything else: the value of markets in price setting, in information collation, are more valuable than the incentives which the private ownership of capital provides. This is similar to the point which Hayek made about markets and democracy, the one he is so derided for when he was speaking about Chile under Pinochet. Similar but not the same please note.

“how much it is propped up by govt regulation”

Very true. And you’ll find that there are still those who you would describe as being on the right (myself, the ASI, the classical liberals in general) who rail against such propping up just as much as anyone else. Indeed, one way of looking at Adam Smith’s writings is to see that he is taking issue with Govt approved and supported monopolies such as the Guilds and trade monopolies.

“how many (most) of the theories espouse by Milton Friedman don’t work”

That’s a difficult one to support. His PhD thesis by the way was about the power of the American Medical Association. The way in which the government supported and enforced monopoly over the supply of medical services was to the detriment of the consumers of medical services. That would seem to be right along with your first point. His views on monetarism have become so embedded that they are now the conventional wisdom: even the Keynesians are now limited to saying that monetary policy only doesn’t work when you’re up against the zero interest bound: before Friedman the entire concept was rubbished. His arguments in favour of drug legalisation and against conscription still seem sound.

His four ways of spending money are bourne out every time a Minister stands on his hind legs and tells us how he is going to spend our money on us. Does anyone really think that we’d have soldiers having to purchase their own kit while the bureaucrats sit on £1,000 chairs if this were not the case?

“how their thoughts of what went wrong are dogmatic”

Well, yes, but that’s not really all that unusual. We see enough people screaming that bonuses were to blame (zero evidence but it sounds good), that securitization made the banks fall over (actually, it was holding on to what had been securitised, if they’d sold it all they wouldn’t have failed). We even see the idea floated that more women in banking would have stopped the rot: entirely missing the point that both men and women take more risks in mixed sex environments than they do in single sex environments. You could, if you were cheeky enough, construct a case that it was women entering the dealing rooms from the 80s onwards that blew up the bubble of risk.

“confuse corporatism with free market capitalism.”

Absolutely true. And again, there are those of us who rail against corporatism just as much as we do against anything else.

“Personally, I’m intrigued by how behavioural economics mixes with traditional models, while looking to combine that with specific goals.”

Ah, “Nudge” and all that libertarian paternalism. My only problem here is that it does require a Pater, an omniscient who knows what it is that we should be nudged into doing. The existence of such a being not being something I believe in.

“And, of course, not paying less attention to GDP growth alone.”

Of course. Why don’t we take what “liberals” really ought to be worrying about, given the roots of the word, as our goal. “Liberty”.

Sounds good to me.

Wow: halfway down a comments thread on a not-particularly-thought-through “economics” piece, I wasn’t expecting to find Sunny and Tim halfway united in a sensible discussion of the merits of each others’ worldviews. Must be National Brotherhood Week or something…

- how their thoughts of what went wrong are dogmatic (see Nick above, citing another economist blaming the govt, and absolving those finance houses who packaged risk wrongly of blame).

Uhh, I believe the monetarist position is not to blame the government as such, but only to say that correct government action is the sufficient and necessary response to prevent a crisis. This is because, IF you have a central bank, it is the only thing that can do so. If you don’t, then there usually exists several other actors that can make the adjustment.

And it is just a matter of history that the packaged debt (sub-prime mortgaged backed securities) was invented by the US government and then enthusiastically promoted it to the market – in such a way that if you wanted to permission to expand or merge, you needed to be prepared to offer mortgages to people you wouldn’t otherwise have done. The “blame the bankers for their greed” morality tale just doesn’t offer much of an explanation for the crisis, not least because bankers are always greedy, and the activity that led up to the crisis has been pretty exceptional. It is not capitalist fundamentalism, Sunny, just the best explanation available so far.

Tim,

I think Sunny meant “propping up” as a good thing – that is to say, the operation of markets relies on things like the Foods Standards Agency, Advertising Standards (laws), and a whole supporting network of non-market regulation and enforcement – and that lots of people on the right do not acknowledge this.

To my mind, this is “an empirical question about which you can be wrong” and Tim while I appreciate you have a deep conviction that Hayek’s insights about how markets process dispersed information mean “planners” are likely to get things wrong (insights I dearly wish the average left winger shared), I’d like to see you acknowledge the empirical nature of the question and an acknowledgment that your mainly analytical reasoning on these matters might be misleading.

It’s very difficult to look at the real world, and decide whether government intervention in markets, in this sense, is a good thing. This is because most advanced economies have a lot of it – the USA economy is much more regulated than often appreciated – so there’s just not the variation in the data to answer the question, easily. We can all think of examples of ham-fisted, counter-productive or pointless government meddling. On the other hand, most of us do not have the time, for example, to verify whether companies are lying to us, reputational mechanisms can only get us so far, and if we left everything to market mechanisms, I think a lot of bad shit would happen (it wouldn’t be all bad – just, I think, worse on net). In fact, if we did leave things to the free market, it’s a reasonable guess that we’d see private monitoring and enforcement agencies spring up – government by another name. Many of things that need to hold, theoretically, for market mechanisms to deliver optimal outcomes (information, bargaining power etc.) just don’t hold in the real world. If we repealed all labour laws, for example, I’d bet my house that we’d pretty soon see plenty of employers treating their workers badly. I think things like maternity leave , minimum holidays, working hours, tea breaks, unfair dismissal, pensions etc. are all things where on net we benefit from non-market legislation. How do you think things would look if employers were allowed to choose all these things, solely motivated by the need to recruit workers in a market, and that workers were never able to say “hang on, that’s against the law”?

Now Tim, I know you acknowledge the importance of good institutions etc. Nonetheless you display a pathological hostility to bureaucrats, and if you are wrong empirically about the contribution of bureaucrats to our welfare, well … wrong is wrong.

NB Sunny: “And, of course, not paying less attention to GDP growth alone” – who does that? Not mainstream economics, which is founded on the concept of welfare. Admittedly, much of economics – in which there is a strong preference for simplicity – usually just bases welfare on leisure and consumption – but even just adding leisure means GDP growth is not the object. And you can add anything you like (equality, a sense of community) to the welfare function; in fact this is why economists tend not to do it – you can explain or justify anything by adding the right ingredients to a utility function. And of course, recognizing that GDP growth is not the goal does not mean that other indicators will fare any better. Advocates of Green GDP should read this.

“it is just a matter of history that the packaged debt (sub-prime mortgaged backed securities) was invented by the US government”

That’s got to be the most insanely inaccurate use of “it is just a matter of history” EVAH (in any case, the mortgages which blew up the worst were not CRA loans anyway).

“It’s very difficult to look at the real world, and decide whether government intervention in markets, in this sense, is a good thing”

Whoa, whoa!

Hold your horses there. As I’ve had to explain again and again I’m all in favour of government intervention in the economy, indeed in the wider society. My contentions are always about “this” or “that” intervention, not the idea of intervention itself.

For example, I support carbon taxes as an intervention to deal with the externality of CO2 emissions. I support copyright and patents as an intervention to deal with the thorny issue of the public goods nature of much innovation.

I wholly and fully agree that sometimes markets fail. That sometimes markets are absent and need to be created.

So there is no philosophical argument here about “intervention bad” or good.

There is simply a series of purely empirical observations about whether this specific intervention is good or bad, whether the problem justifies intervention, whether the intervention would solve the problem or even be counter-productive.

I might even argue for intervention a great deal less often than others: but I never argue for no intervention.

“I think things like maternity leave , minimum holidays, working hours, tea breaks, unfair dismissal, pensions etc. are all things where on net we benefit from non-market legislation.”

An empirical answer to that question. The US has no statutory right to paid holiday. Almost all Americans working full time do get paid holiday though.

“Nonetheless you display a pathological hostility to bureaucrats,”

Indeed, for I have read C. Northcote Parkinson. More people should do so.

Tim,

sorry, yes I appreciate that it’s not a matter of “intervention; good or bad” and I know you favour specific interventions … nonetheless, unless your written output is a misleading guide to your true opinions (which is possible) I don’t think I am imagining a generalized hostility to bureaucrats on your part, and to government agencies legislating on matters that could be left to markets. This is, as you say, a matter of degree, so you may still be wrong in arguing “for intervention a great deal less often”.

I know it cuts both ways, by the way; this is an empirical question about which I might be wrong too.

yes but how much paid holiday do Americans get, thanks to the market?

I haven’t read C. Northcote Parkinson – he’s now on my list.

[28] Tim, Parkinson would be the first to tell you that bureaucracy is not the same as public sector. Small charities are not bureaucratic; large PLCs are. My own rule of thumb is that if it’s got a Personnel/HR department, it’s a bureaucracy and too large for its own good – on the other hand, if it’s a bureaucracy there’s a pretty good chance that “producer capture” is going on so it tends to be a rational choice to work for one.

“yes but how much paid holiday do Americans get, thanks to the market? ”

10 days on average.

The best Parkinson is “Parkinson’s Law”.

Tim

yes, 10 days! Do you think that is the market delivering the “right” answer, or of a market failure?

As that’s what everyone seems happy with, the right answer of course.

of course? how do you know Americans wouldn’t prefer more paid holiday?

Imagine yourself, for a moment, as omniscient social planner. You know everybody’s utility functions, you know the general equilibrium consequences of legislating extra days paid leave. There is an optimal here, trading off lost income against extra leisure.

What makes you think 10 days is close (enough) to that optimal? Because that’s the outcome that that market has produced. But how do you know that the optimal isn’t a payoff in a game that cannot be reached by rational players, in the absence of some commitment technology like legislation? There are co-ordination problems here, right? If every firm offered 20 days, no firm would be at a competitive disadvantage. But if firms can deviate, and cut costs by cutting holidays, it will put others out of business, and will do so. So how come firms can still recruit, if Americans would really prefer more holiday? I have to admit, I don’t know why, in sectors where firms find it hard to recruit, firms don’t offer more paid holiday alongside higher wages*. Perhaps this does mean Americans do prefer more money to more leisure. At the same time, in the presence unemployment, or say, in banking, many more applicants than vacancies, workers cannot hold out for more holiday because somebody else will take the job. So how do you know the market is able to deliver the point on the trade-off between income and leisure that Americans would choose, if they didn’t have to compete in a real world imperfect job market?

I cannot say either way – I find it hard to believe Americans wouldn’t be happier with more holiday, but perhaps that just betrays my prejudices. I don’t know what the “right model” for explaining the equilibrium number of days holiday in the real world US labour market, is. But I do think that you saying that “of course” 10 days is the right answer, and I also think confusing the competitive equilibrium we observe, with something “everyone seems happy with” and hence the right answer**, betrays your prejudices.

* I presume most jobs don’t like workers taking unpaid leave, so you can’t in effect buy paid leave by taking a higher salary and then unpaid leave

** recall, a Nash equilibrium is a strategy set where everybody is “happy” with their decision, given what everybody else is doing. It does not mean everybody couldn’t be made a whole lot better off, if, say, legislation was possible***.

*** legislation is of course possible; I don’t know why Americans choose not to use it.

Holiday entitlement really is a perfect example of how government legislation produces better outcomes.

For most jobs, it’s pretty much impossible to negotiate extra holiday when joining/wage-bargaining, whereas negotiating extra pay (which is *the same bloody thing*) is easy and indeed encouraged. I’d happily take a 10% pay-cut for 10% fewer work-days, but there are very few places where this is viewed as a serious option.

Hence, in countries where people can vote for politicians who’ll arrange extra holidays, they get them; in countries where people are left to negotiate themselves, they don’t.

why, I wonder, is there so little variation in days of paid leave across jobs, than there is in wages?

what sort of utility function would generate that – the income effect (getting richer – allowing you to “purchase” more leisure) is exactly offset by the substitution effect (leisure becoming more expensive as opportunity cost – forgone income). I suppose that might be a reasonable approximation to reality.

on the other hand, there could be reasons why social norms are more important when it comes to holiday allowances than wages. Why are firms more willing to adjust pay than hours? I think Chris Dillow would say it’s to do with the nature of the production technology – somebody working 20% fewer hours than co-workers is more than 20% less productive, and the output is maximized by synchronizing working hours. Still, I don’t buy that story for many industries.

what about the demand side – perhaps despite many people saying they’d accept less pay for fewer hours, the reality is that job applications look at pay first and hours a distant second?

Tim: The US market delivers the best outcome for holiday entitlement.

Luis: How do you know it’s best?

Time: Because that’s what the market delivers.

Fair summary?

The market is the sum of all voluntary interactions. So in the absence of a reason to think that the sum of voluntary actions produces an imperfect result (and there are many such that even I’ll agree to, public goods, externalities) then yes.

The argument “but people want longer holidays” doesn’t quite cut it: for we’ve no evidence that people change their behaviour in that manner, to desire greater statutory leisure in return for lower cash incomes.

We do indeed find that people do trade higher incomes for more leisure: leisure time has been increasing for a couple of centuries now. But that isn’t an argument in favour of more statutory holiday. In fact, the American v. European (in so far as there actually is a “Europe” experience) numbers seem to stack up in that Americans take less such “vacation time” but use their higher incomes to buy in more of what in Europe would be home production.

And when you do look at leisure time (rather than “vacation” time) you find that total leisure time in the two places are not really all that different. Indeed, for certain groups, (American women as against German for example) US leisure time is higher. But it is the US which has gone the market route to find out what the people want and Europe the statutory route. Giveng us different methods of reaching the same thing, the trade off between leisure and work.

Now, having added all those caveats, do I think that the American, market, solution is the better one? Yes, for it’s the one that has not been imposed upon the populace, it’s the one that people have themselves reached: expressing their desires by their actions.

I’m torn. Other times I would also be extolling the virtues of markets, with regard to letting people “express desires by their actions”. I guess it comes down to whether, in the context of labour markets, we have an “absence of a reason to think that the sum of voluntary actions produces an imperfect result” – I mean, more than usual. I’m inclined to think of labour markets as dysfunctional, mainly because of the presence of unemployment.

I don’t know who is right here. Larry, your summation is fair, but tack on the necessary qualifications and Tim’s “market outcomes are right by definition” needn’t be as silly as it sounds. It is possible, that given the choice, people would choose more income and less holiday.

It’s interesting that leisure time isn’t actually too different in the US, if you account for home production (however that’s measured – I don’t really know what it means – there are more stay-at-home ‘moms’?). I have met Americans who complain bitterly about vacation allocations, and say there’s just no real choice…. I wonder why that is. If true, is it compatible with Tim’s benign view of the labour market?

Tim, I don’t see much sign of you responding to possible game-theoretic reasons why “sum of all voluntary [non-cooperative] interactions” can still lead us to an inferior outcome. But on second thoughts, I’m not sure how relevant they are; what would a holiday bargaining game look like? Still, I think you ought to be more cautious about presenting market outcomes – the sum of voluntary interactions – as the best we can do. For a start, as you will know, Pareto optimality still leaves room for legislation “imposed upon the populace” to make us better off.

Here’s a quote from research hereM/a>:

There are good reasons to expect firms to offer fixed hours/wage packages …. that involve steep tradeoffs and to limit variation in … days off. There is abundant evidence that they do so…. Whether minimum vacation laws needlessly restrict choice or solve a failure of the market to provide an efficient level of vacation is an open question.

oh crap. what happened to that edit gadget?

It is perhaps also worth pointing out that the term “labour market” smuggles in a stark ideological assumption without justification. It is important to market theory that any individual can engage in, or withdraw from, a given market without incurring significant costs (the assumption is that an individual who withdraws from one market then enters another).

But there is only one “labour market” so this element of market theory cannot apply. The “theory of the firm” implies that the interests of the firm (i.e. the capitalist) are legitimate whilst those of factors of production are not – they are merely means to an end. Neo-classical economics is nothing other than a way of glorifying the very few (and for no reason – entrepreneurs don’t even create wealth, it’s banks that do that) and abusing the overwhelming majority of humanity.

Mike,

I don’t recognize what you write about market theory supposing “withdrawl” from markets is possible without cost. Your second para looks flat out wrong to me. Neoclassical economics usually proceeds from a household maximization problem, involving wages and leisure (as well as rents from assets – the capitalist bit). The welfare of workers is the end to which their labour is the means.

“It’s interesting that leisure time isn’t actually too different in the US, if you account for home production (however that’s measured – I don’t really know what it means – there are more stay-at-home ‘moms’?).”

They’re called “time use surveys”. They exist for all industrialised nations.

It’s an extremely important concept if you want to talk about such things as the “work/life balance” and so on: including such things as vacations.

We all do certain things which only we can do for ourselves: eat, sleep, wash etc. Most of us also do work for pay out in the market. And just about all of us do work in the home: “home production”. The usual definition is things which we could hire somene to do but choose to do ourselves without pay (this has problems, ie with things like sex, but it’s an agreed definition everywhere).

Thus sending the kids out to childcare is purchasing that service in the market. Being the bird at the kindergarden is performing that task in the market. Doing it yourself at home is home production. Sending out for a pizza is market: making one at home is home production.

There are also more sterotypically male versions: repairing the car, cleaning leaves out of the gutter and so on.

The balance left over after personal activities, market work and home production is by definition leisure.

So we can note that, for example, women’s working hours have risen in recent decades. But also that women’s leisure hours have risen. Personal activities haven’t changed to account for it. What has? A reduction of hours in home production.

Similarly, male home production hours have fallen. Thus both sexes are working shorter hours (it’s actually quite a large amount. 8 hours a week less for US men over recent decades) entirely contrary to the usual moans about “ever longer working hours”.

Similarly we find that male and female leisure hours in the UK are just about equal…a few minutes a day one way or the other.

Where it gets interesting is across countries. Typically, Europeans spend more hours in home production than Americans, less in market production. But the net is usually (but not always) that Europeans have fewer leisure hours. So taking total working hours as our measure, we might actually say that Americans work less than Europeans. Not what we’re used to hearing, for sure, but if they work more market hours and purchase more of the services which can be substituted for by home production then why is that so wrong? Or worse (or even better?) than the European solution?

This is a point made very strongly in the Stiglitz/Sen thing they just did on alternatives to GDP for Sarkozy. And it might be one of the reasons you’ve not seen people falling over themselves to praise the report after people read beyond the Exec summary. For the implication is that (not expressly spelt out, but the implication is there) a greater proportion of market hours as opposed to non market (ie, the US rather than European) leads to greater wealth.

For they apply a value to the hours spent in household production: the general undifferentiated rate for labour. That’s how it should be measured in GDP (like) statistics. But that general labour rate is of course lower than the average rate in the market economy. So they are saying that market labour, on average, pays more than home rpoduction: thus you’ll be richer by doing the market work and buying in the subsititutes for home production (this makes sense, as market labour allows division of labour, specialisation and trade which home production generally does not).

Another way of saying the same thing: for any given number of working hours you can enjoy the same standard of living and have more leisure the more of your working hours are in the market, not home, economy.

And back to the point: the US system has this selection of market as opposed to home working hours based on a more market solution than Europe does. Fewer forced (ie statutory) holidays, fewer restictions upon market working hours. I would thus assume (and agree, could be wrong, but would need convincing with real evidence) that the balance decided by people who were free to choose would be better than the balance reached by those who find one option, longer market working hours, closed off to them.

But in order to understand all of this it is, as above, crucial to note that market working hours are not all the work that people do. As Stiglitz and Sen point out, the number we’re actually interested in is the number of leisure hours. And on that basis, the US really isn’t all that different from most of Europe: but they are richer for the same amount of work.

[42] WTF is “household maximisation”?

Most of us also do work for pay out in the market. And just about all of us do work in the home: “home production”.

Isn’t the problem with these calculations that ‘home production’ consists primarily of enjoyable leisure activities like cooking and DIY, whereas comparable work-for-pay is unremittingly miserable and horrific?

I’d happily spend two hours cooking a decent meal. It’s fun. But two hours in the kitchen at Pizza Hut? I’d rather chew my own arms off…

er … I more meant I wasn’t quite clear on the details of how home production is defined and whether the big differences in the data happen in childcare – US mothers at home counted as home producers. OK, I can buy the idea that total output (wealth) might be higher if more production was done in the market than that home; I’m not clear on the welfare implications, and it’s welfare that’s at the bottom of whether the market has delivered the best outcome. If I was working all hours in the market, I’d be ordering take out pizzas and paying somebody else to tile the bathroom too. Which is preferable? Who knows. I know which one I prefer, but I like cooking and DIY.

You talk about people in Europe having “one option, longer market working hours, closed off to them” but you could equally say that de facto most Americans have the option of more paid holidays closed off to them. It’s just not on offer. You are not really biting on the possible reasons why the labour market might not be the unproblematic expression of people’s desires you like to think. Maybe I’m just a chronic ditherer, but that (I think) unfounded confidence looks like ideology at work to me. But hey ho, you can probably level the same accusation at me.

44.

It means the objective (that ’solves’ the model and generates its predictions) in most* neoclassical economic models is to maximize the welfare of households, which may be many and varied but simple models often use a representative household, and welfare depends on the wages, leisure and income from assets. More generally, neoclassical economics is based on maximising the welfare of the people who populate the economy – there’s just no way you can say it treats workers as means to the end of enriching capitalists.

* perhaps it’s a mistake to say most. depends what the question under consideration is.

“Isn’t the problem with these calculations that ‘home production’ consists primarily of enjoyable leisure activities like cooking and DIY, whereas comparable work-for-pay is unremittingly miserable and horrific?

I’d happily spend two hours cooking a decent meal. It’s fun. But two hours in the kitchen at Pizza Hut? I’d rather chew my own arms off…”

I’ve not done Pizza Hut but I have Shakey’s (and Arby’s, Denny’s etc) and I absolutely hate cooking at home and think DIY is entirely the Devil’s spawn. I would much rather sdo the two hours work, buy a fry up (Good grief, no, of course I don’t actually eat at either Arby’s or Pizza Hut) and have change than I would do the cooking.

But then of course it is different preferences that make up a market.

As Stiglitz and Sen point out, the number we’re actually interested in is the number of leisure hours.

No I think this is wrong. What this boils down to is never seeing your kids and eating take-away pizza every day because you’re too stressed and knackered from long hours at work in the market.

[44] The models must all have been changed since the 1960s. All I can remeber about welfare economics is something called “utils” which I don’t think even the author of the textbook could bring himself to take seriously.

Let’s take a real world example. When communism collapsed in Albania, the secret police lost their jobs. Did they turn themselves into entrepreneurs? Of course not, they turned themselves into a mafiya preying on those who foolishly thought life bore some resemblance to neo-classical economic theory.

And there’s nothing that special about Albanians. Many of the entrepreneurs I have met would prefer to be mafiosi, it’s just that – to date – in Britain the coercive apparatus of the state has been too strong for them.

Well there is nothing wrong with coercive apparatus (of the state or whatever else) in defence of persons and property, and I am sure plenty of fairly disreputable people have become entrepreneurs when given the correct incentives not to predate off others.

Albania is bad sure but partly because it had most of its social capital drained out by the Soviet Union, leaving some seething ethnic tensions that just begged for some local strongmen to come into the vacuum. Tough for any society to dig there way out of there, as the on-going problems in parts of Italy and Northern Ireland attest. But there have been some pretty good successes too. Poland, Estonia, Slovakia et al – all more prosperous and without all that many mafiosi either. They had secret police too, presumably they are doing less harmful occupations these days. Whats the alternative? Keep paying thugs to do thuggish things?