Empty Sets
Via Tyler Cowen, a good summary of The Recalculation Story by Arnold Kling. Via Justin Slotman, Yves Smith demolishes an impressionistic recalculationist account in the WSJ.
The Kling piece has the virtue of clarity. As to the theory itself, I have problems. But taken on its own terms:
1. Why not just call it the “Capitalist Calculation Problem?”
2. I don’t just suggest the alternate name for the snark value. Kling presents recalculaton as a continuing problem for sorta-kinda market economies like ours, not just as a spasmodic event.
3. As a continuing problem, Kling declares that it worsens over time, as technology advances.
4. Is it a problem? Absolutely. It’s growth-retarding and thus diminishes welfare.
5. Even as described by its adherents, Recalculation seems to mean that SKMEs are systemically misallocating labor. I realize that under neoliberalism labor doesn’t count, so let me flip it around: Recalculation means that SKMEs are systematically misallocating capital too. Because for these new jobs that no one has the skills to perform to exist, it means that someone invested in a firm whose success depends on filling jobs nobody can fill. Someone signed off on those business plans, wrote those checks, guaranteed those lines of credit. I have trouble seeing this as exemplifying “the wisdom of the market.”
6. That’s to the extent that you have a “perfect mismatch” between jobs available and a labor pool to fill jobs: IOW, you have a million jobs going begging over here and a million workers unemployed over there. Where you have, say, five million “unfillable” jobs versus fifteen million unemployed workers, you also have a garden-variety jobs shortage.
Comment by mds —
August 10, 2010 @ 8:30 am
Huh. If Keynes hadn’t been proven utterly, completely wrong by the titans who failed to notice an enormous real estate bubble and who are now pushing 1937-style double-dip recession policies, I’d timidly suggest that there might be something to his notion of “underemployment equilibrium.” Oh, well.
(I do find it humorous that after spending decades exploiting the free flow of capital and the lack of comparable flow in labor to destroy wages in this country, these guys are now scratching their heads over why an unemployed person whose mortgage is underwater might not jump at the chance to relocate to Dubai.)
Comment by Graeme —
August 10, 2010 @ 9:03 am
I stopped reading when Kling bluntly stated that it is never economically efficient to cook or do anything for yourself (number 4).
That’s empirically false, and sheer lunacy to boot.
Comment by Wonks Anonymous —
August 10, 2010 @ 11:32 am
“1. Why not just call it the “Capitalist Calculation Problem?””
http://www.econlib.org/cgi-bin/searchblogs.pl?blog=5&pgct=1&sortby=R&searchfield=P&author=akling&datelist=0&query=%22capitalist+calculation+problem%22&x=12&y=17&andor=and
Apologies if you intended to put emphasis on the word “just”.
“I realize that under neoliberalism labor doesn’t count”
Not any neoliberalism I’m aware of. Under slavery or serfdom you might argue that labor does not receive its proper reward (whatever that is), but it is a completely separate thing from saying that slaves & serfs can’t be inefficiently allocated to tasks.
Graeme, you may like this from Nick Rowe on homesourcing work.
Personally, I am not in the recalculation camp. I’ve had enough of the Austrians and their fellow-travelers among the heterodox. Neoclassical econ uber alles! Regarding the current situation, I go with Scott Sumner & a sprinkling of Casey Mulligan.
Comment by Jim Henley —
August 10, 2010 @ 12:12 pm
By golly, I gotta give props to Arnold for that.
Comment by bbartlog —
August 10, 2010 @ 12:36 pm
Seconding Graeme, above. Contemplating this example *should* lead an intelligent person to realize that GDP is a flawed measure that we use because it’s all we’ve got (actually it reminds me of Robert Kennedy’s speech on the topic…). Instead we get what amounts to a defense of the street lamp fallacy.
Also, trying to formulate this as a generic and recurring ‘Recalculation Problem’ is really unhelpful. There are some specific things going on (American debt levels, global wage equalization in some fields, demographic issues related to increasing elderly populations, and so on), study of which provides at least some insight into why we have problems and why they take the shape they do. Trying to move things to such a high level of abstraction is in this case just twee.
Pingback by Matthew Yglesias » Ideological Positioning of Recalculation —
August 10, 2010 @ 3:45 pm
[...] problem, as Jim Henley points out, is that the “Recalculation Story,” if true, implies radical underlying flaws in the capitalist economic model that call not for small-bore government intervention but for wholesale rethinking of the way the [...]
Comment by Nicholas Weininger —
August 11, 2010 @ 9:53 am
#2 and #5 are being really uncharitable. What Kling is saying, as I read it, is that
(a) activity that does not involve trade and/or specialization, even if it is productive, is not in scope for economic analysis
(b) this means that economics does not apply to all activity people care about, but that is OK, because trade and division of labor are the sources of so much of the wealth of the world, and make people better off such an overwhelming majority of the time.
This is in keeping with Kling’s general intellectual humility: he understands that his discipline is uncertain and limited in many ways, and defends its usefulness despite that, in part on the grounds that all human disciplines and institutions are necessarily uncertain and limited. This humility is one of the reasons I like reading his stuff. I suspect, Jim, that Kling would in fact agree with every one of your points. As he likes to say: “Markets fail; use markets.”
I suspect also that he would frame a response something like this: suppose we want to limit the negative impact of recalculation. What can we do? The problem is hard because the underlying cause is increasing specialization, and increasing specialization is in general an enormous good. But there are a couple of directions to go in:
– You can make reemployment of workers in new sectors, where they will initially have low marginal product, easier by decreasing the fixed costs of employment. This might involve a payroll tax holiday, or it might involve that old standby of both free-marketeers and socialists: decoupling health insurance from employment. He has a followup post on EconLog pointing to the importance of the latter. There are industrialized countries with arguably more flexible labor markets than ours, both to our “left” generally (Denmark) and to our “right” (Singapore), and we might look to see whether their workforces are more adaptable to sectoral shifts.
– It seems plausible, and supported by the data so far, that college-educated workers face much less of a recalculation barrier. This might lead you to advocate reducing the cost of higher education in one way or another; or you might suspect that it’s the credential more than the substantive education that gives graduates flexibility in the face of recalculation, and ask how to reduce the necessity of the credential.
Pingback by Kling’s Recalculation Problem – Economic Thought —
August 11, 2010 @ 12:43 pm
[...] intervention but for wholesale rethinking of the way the economy functions.” Jim Henley, “Empty Sets”, Unqualified Offerings. Henley is less direct in his accusation, “Kling presents [...]