nonrevolutionary.
Remark: Denote High and Low gross productivity as _H _and _L._ Note
that _B _is net. Also_ bhl-ness _technically implies _H >> L B._
Remark: _L_ may be associated with a minimum wage and _H_ with some
average income including profits.
Remark: An example of ‘meaningful’ are subgroup subperiod averages.
Remark: Stability can sometimes be found by normalizing, e.g. take
subperiod _H(t)_ as the subperiod numeraire.
Remark: A person’s benefit is often related to the former period
working wage. However, anything can be clustered into a social
subsistence average. People ‘between jobs’ could be taken to be
basically in the employed cluster, people with serious unemployment
could be in the other cluster. Don’t object that this makes the matter
tautological - since that is exactly what we try to do. (We try to find
the definitions that make our understanding tautological.)
Remark: A nonrevolutionary welfare state still allows for politics and
economic change.
Lemma I: A welfare state is BHL iff there is stability over the
regimes for the variables _B, H, L _and the associated numbers of
agents.
Proof: Self evident. Q.E.D.
Remark: The relevant notion is that the change from unemployment
towards full employment (or vice versa) does not destroy the productive
base of the economy. Instead of taking this notion explicitly, we have
taken a stronger property of nonrevolutionarity, that allows, if
_bhl_-ness applies too, to take (approximate) constancy of the
variables.
Remark: At first glance these definitions seem self-defeating for the
effort to apply the mathematical method to employment regime switches.
When 35 million, nowadays unemployed in the OECD, are supposed to find
a job, then apparently the policy maker is supposed to be able to judge
on the ‘stabilities’ involved. That seems an impossibly strong
assumption. We may however remind about the regime switch from
1950-1970 to 1970-2005. In addition, as modellers we discuss
equilibrium states of various paths. Also, it is possible to give the
variables an incremental interpretation, e.g. take 34 of the 35
(million) as permanently on benefit, and only look at 1 million on the
margin (giving “local-BHL-ness”).
Lemma II: For a welfare state, the (apparent) existence of people
with a productivity _L’< B, _does not block the application of
BHL-ness.
Proof: Consider the pathological case of people with productivity _L’<
B, _i.e. so low that (in whatever regime) their net market income is
lower than_ B._ Take the dentists, who in a regulated market cannot
start a practice, and who are very bad at farming in a flowerpot (which
could be done with a Cobb-Douglas production function). These people
can be treated as:
(1) society is willing to classify them as (iii-a)
(2) like the Swedish/Japanese approach, they may keep on working
with some employer subsidy _Z;_ in that case _L = L’ + Z_
(3) society lowers _B_ to_ B = S _or _B = L’,_ and reconsiders
the problem
(4) if regulations are the bottleneck, then changing these
regulations redefines ‘given’ productivity _L’_. Similarly, if
Keynesian methods solve unemployment, then only if people’s _effective
productivity_ is restored. So the reduced form applies anyhow. (In that
case the regulation or lack of a policy measure is a tax in terms of
the reduced form, and ‘real productivity’ is higher than _L’_.)
(5) they get charity, steal or die, and hence there is no
welfare state.
Hence BHL-ness implies that these cases can be ‘averaged out of the
discussion’ or be left out for expository reasons.
Q.E.D.
Remark: In other words, BHL-ness is sufficient for discussing
employment in the welfare state (but not necessarily for other topics,
for example, how regulations affect productivity).
The theorem
Theorem BHL.1: For a BHL economy, both full employment and
unemployment are possible.
Proof:
The structure of this proof is, that we determine the accounting
equations, find the reduced form tax relations that are implicit in
these, and then deduce the critical tax parameters that determine the
regime switch.
Looking at the BHL concept, the only possibility for variation is in
category (iii-b). The recipients in that class all move together, and
thus there are only two regimes (_in_ or_ out of _benefit dependency).
Given that gross productivity has been fixed, the only possible
variation concerns net income. We assign the term “tax regime” to the
possible states in net income. We find, in other words, that these
regimes are implicit in the BHL concept. Let _t_ be the index for tax
regime 0 (unemployment) or 1 (full employment).
Given BHL-ness, we thus have: _t_ is 0 or 1, and:
_ b_ permanent benefit recipients;
_ h_ persons with gross productivity _H_ and net _N_(_t_)_;_
_ l_ persons with gross productivity _L << H,_ and net
_K_(_t_)_._
The regimes are characterized by net income conditions _K_(0)_ < B_
and_ K_(1)_ B:_
(0) In regime 0, _K_(0)_ < B_ and_ l_ are eligible for benefit
_B_, and they don’t work.
(1) In regime 1, _K_(1)_ B_ and _l_ don’t get benefit _B_, and
they work and earn _L._
On benefit, the welfare rule is strict on not-working, while by
assumption the black economy can be neglected. Off benefit, the_ l_
have no other means of support and thus work, and earn gross _L._ Since
net income cannot be larger, _L K_(1)_ B._
In the following equations, personal income _y_ takes values _H_ and
_L._ Relation (1_-t_) below gives the implied tax system, where the
personal tax _T_(_y, t_) depends upon personal income _y_ and the tax
regime_ t:_
_ T_(_H, t_)_ H - N_(_t_)_ ; T_(_L, t_)_ L - K_(_t_)_ _
(1_-t_)
Two points share a line. Hence, the tax system can be represented by a
straight line, with an intercept and a marginal tariff. These implied
‘parameters’ (actually: reduced form variables) are defined in (2_-t_),
with 2 pairs of 2 equations & 2 unknowns, giving tax exemption
_X_(_t_)_ _and marginal rate _R_(_t_)_._ The line is the _reduced form
_representation, while the statutory system which guides people’s
actions could be anything. Each regime gives a _set_ of reduced form
lines; our interest concerns the boundary line.
_ R_(_t_)_ _(_y - X_(_t_))_ T_(_y, t_)
(2_-t_)
Relation (3_-t_) defines national income _Y_(_t_)_,_ where the personal
incomes are multiplied by the numbers of persons involved. Revenues_ h
H + b _0_ = h H_ are regime independent. Depending upon the regime the
_l_ bring in _L_ or not.
_ Y_(_t_)_ h H + t l L + b _0_ _(3_-t_)
Relation (4_-t_) states the condition of a balanced budget. National
income equals the sum of net incomes after redistribution. The
condition may be called “Walras’ Law”.
_ Y_(0)_ = h H = h N_(0)_ + _(_l + b_) _B_
(4-0)
or _ h T_(_H, _0)_ = _(_l + b_)_ B_
_ Y_(1)_ = h H + l L = h N_(1)_ + l K_(1)_ + b B_ (4-1)
or _h T_(_H, _1)_ + l T_(_L, _1)_ = b B_
The budget condition implies that the tax ‘parameters’ are functions of
each other. Per regime, a higher exemption means a higher marginal
tariff, and vice versa. The regime switch itself might, but need not,
be the exception. Given that marginal rates _R_ are generally regarded
as policy variables, we solve for _X._ With _X_(1)_ L:_
_ _
_ _(4-0) _ h R_(0)_ _(_H - X_(0))_ = _(_l + b_)_ B _
_ _
_ X_(0)_ = H - _(_l + b_)_ B / _(_h R_(0))_
_(5-0)
_ _
_ _(4-1) _h R_(1)_ _(_H - X_(1))_ + l R_(1)_ _(_L -
X_(1))_ = b B _
_ _
_ X_(1)_ = _(_h H + l L - b B / R_(1))_ / _(_h + l_)_ _
(5-1)
There is a _set of _critical levels of gross income _M_(_t_)_ =
M_(_R_(_t_)_, t_)_,_ such that unemployment results iff earnings _L_
are less than _M_(_t_)_._ This follows directly from rule (iii-b). This
critical income solves from:
_M_(_t_)_ - T_(_M_(_t_)_, t_)_ B_
_ M_(_t_)_ = M_(_R_(_t_)_, t_) _= _(_B - R_(_t_)_ X_(_t_))_ / _(1_ -
R_(_t_))
(6_-t_)
Under unemployment, the benefits cause additional taxes _l.B_ which are
levied on a smaller tax base. Given that _l_ are unemployed anyway, the
tax exemption _X_(0) can be lowered, so that the marginal rate is as
low as possible. This has the effect that _M_(0) shifts to the right,
so that the gap between the possible wage _L_ and the wage ‘required
for a decent living’ widens. There is obviously hysteresis, of a
‘catastrophic’ kind. Conversely, _M_(1)_ _can range in _B M_(1)_ L_
and allow for larger _R_(1)_ _though this could have little effect
since also _X_(1)_ _rises (see below). While these properties apply to
the reduced form, the same mechanisms apparently apply to the
structural form too (as they concern the same reality).
Substituting (5_-t_) in (6_-t_) gives _M_(_t_) as an explicit function
of _R_(_t_)_._ The regime switch occurs at _M_(1) = _M_(_RS,_ 1)_ = L_
with _switch_ marginal rate _RS_ and implied exemption _XS:_
_bB - _(_h + l_)_ _(_L - B_)_
RS =_ ----------------------------- (7-_RS_)
_h _(_H - L_)_
_
_bB - _(_hH/L + l_)_ _(_L - B_)_
XS = L ----------------------------------_ (7-_XS_)
_bB - _(_h + l_)_ _(_L - B_)
Rewriting conditions _K_(0)_ < B_ and_ K_(1)_ B_ gives:
_ _{_L - T_(_L, t_)_ < B_}_ __ _{_ X_(_t_)_ XS & L < M_(_t_)}
(8_-t_)
_ _{_L - T_(_L, t_)_
> B_}_ __
_{_X_(_t_)_ XS & L > M_(_t_)} (9_-t_)
Now consider the regimes, and determine whether they can exist:
Full employment: Given that_ L > B, _it follows from (9-1) that the tax
exemption can be chosen on or above the critical value _XS._ Hence _XS
X_(1)_ < H._ A prime example is _X_(1)_ = B._ Hence (iii-b) is empty.
Unemployment: _L_ is given as the market clearing wage for low
productivity persons. If_ X_(0)_ < XS,_ then taxes on these persons are
increased, and their net income drops below _B._ Given that _K_(0)_ <
B,_ they are eligible for benefits, and apply. Hence (iii-b) is not
empty.
It has been shown that both cases are possible. Q.E.D.
Remark: This exposition may seem an overly complex translation of the
Cohen Stuart 1889 quote (above) to the welfare state situation. The
proof might have said “self-evident” after the first paragraph. Given
the record of unnecessary unemployment, this author may however be
excused for driving the point home. The usefulness of the BHL concept
may be, that officials now can report, “we have diagnosed _l_ people on
benefit who should be able to earn _L > B _on the market, so let’s try
to find out how we are stopping them from doing so”.
Remark: A more didactic exposition may start with a _structural _tax
relation, e.g. with_ R(t)_ replaced by _r_ in (2_-t_); see for example
the Bentham tax. Then one can show that a _ceteris paribus _reduction
of the tax exemption will increase unemployment. Hence, for the return
of full employment it is necessary (but not sufficient) to increase
income tax exemption - or something from the _ceteris paribus _part.
Then, the second step in the exposition (as we have done here) is to
rename the axis into _compounded variables _(including VAT,
regulations, subsidies, excises, charity, etcetera), and then consider
(2_-t_) as the reduced form. Then we find necessary and sufficient
conditions. This however only works satisfactorily for an accepted
model of a real economy.
Remark: The theorem doesn’t establish that unemployment has only _one
_cause. Various kinds of unemployment have various causes. But, when
various causes are mapped into the world of BHL-ness, then the theorem
applies. For example, a long term unemployed academic would be
categorised as unskilled labour, even though his employed colleagues
earn much more. (The BHL concept thus is drastic. The reasons for
applying it have been explained elsewhere.)
Remark: The theorem is strongest in the _t =_ 1_ t =_ 0 part. Given
full employment, it is easy to mess it up; and it is easy to see that
you can mess it up. The other way around is less obvious. Here, both
the requirement _L B_ and Lemma II are crucial. For expository reasons
those are sufficient, but not as sharp as they could be. For example,
we might accept a small loss in _H_(1)_ H_(0)_, _as long as net
_N_(1)_ N_(0)_.
_However, even then the analytical structure remains, that productivity
_L _is _assumed, _so that it doesn’t come as a big surprise that
employment is possible. This actually is similar to the Arrow-Debreu
setting, where endowments are assumed, and full employment appears to
be possible. The modern reader might be inclined towards assumptions
that generate the impossibility of full employment. (See for example
the Grandmont (1983) setting of expectatory mismatch.) However, each
impossibility can be questioned too. It is up to _reality_ what model
applies. Stated differently: the value of above tautological theorem is
that it helps us to understand what is implicit in our concepts, so
that we may be more aware in observing whether these concepts apply.
This fits in with our concept of a _proposition._
Remark: The reduced form also captures the ‘physical tax’. The lack of
infrastructure, machines or tools may ‘tax’ people - and once these
have been provided, they could start earning income, and their earnings
would, crucially, be larger than needed to pay for the equipment.
Economists of course understand this concept of a physical tax - as the
lack of efficient capital markets, or the frustration of those by taxes
- but the crucial point is the abstract one. When people don’t earn
anything, and the economist suggests to abolish some tax, then a
listener may become upset, since how can you abolish something that
people don’t pay ?
Graphical presentation
Diagrams help understanding the analysis. Figure 42 shows two tax
regimes, _T_(_y,_ 0)_ _and _T_(_y,_ 1), characterized by different
exemptions _X_(0) and_ X_(1)_,_ and different critical incomes _M_(0)
and_ M_(1)_._ The main difference is net income at _L_. In regime 0,
net income at _L_ falls below subsistence, causing unemployment and
higher taxes to pay for benefits.
Figure 42: Tax regimes
It can be seen that _T_(_y,_ 0)_ _is above_ T_(_y, _1),_ _or that
average tax rates are lower under full employment. On the left section
of the horizontal axis, _X_(0)_ < X_(1)_. _On the right section, since
taxes in regime 0 are higher and levied on a smaller tax base, _T_(_H,_
0)_ > T_(_H,_ 1)_._ Thus the effect on the average tax rate is clear.
The effect on the marginal rate depends upon the numbers. The case
depicted here, with a higher marginal rate in regime 1, is only one
possibility; but it shows that a higher marginal rate can combine with
actually lower taxes.
40. The possibility of co-ordination
Chapter 40 showed the technical possibility of full employment for a
welfare state. Chapter 34 showed that social choice is feasible, in the
sense that there are consistent and reasonable constitutions that
society might deem attractive. In particular, there is the example of a
constitution that uses the efficiency criterion (Pareto optimality, PO)
to select its policy. There still remains one issue to settle. This is
the issue of information. Society might have a consistent preference,
and consistently prefer full employment above unemployment, but when
people don’t know that it is possible, and instead even have theories
that tell them that full employment is impossible, then society might
still choose for unemployment as the best of all evils. The issue of
information already featured in our discussion of Arrow’s Theorem, and
now returns for our discussion of unemployment.
We again follow the procedure given by our methodology. We select
stylized facts, develop our concepts, deduce results, and link back to
reality. We will first construct a subsidiary lemma that is very
general and concerns any suboptimality due to misinformation. Then we
take our theorem on the possibility of full employment, recognise it as
an item of information, insert it, and construct our theorem on the
possibility of co-ordination. [116]
Stylized facts
Recorded full employment situations may have been caused by ‘chance’.
Policy makers in 1950-1970 may have thought that functional finance was
effective, while it also was the tax exemption level. A re-evaluation
of the history may however also show that leading economic advisers in
the 1950s may have been wiser than those of the 1960s.
It remains a stylized fact that much of the subject matter on
employment is well-known. For example in Holland, CPB economists Van
Schaaijk (1983), Bakhoven (1988) and Colignatus (1990) pointed the way
to full employment. The state of knowledge turns out to be part of the
model.
There is a Pareto Optimizing Change (POC) iff some advance and none
suffer. A change from unemployment to employment need not be _strictly_
POC. Note that we already have resolved that we don’t need high
unemployment to keep inflation in check. So the CWIRU is no argument
against a POC. There are other clear reasons that pose a problem. First
these two:
· Some bureaucrats have plush jobs administrating the unemployed, and
would lose their job and sense of power.
· The unemployed would lose their leisure. For some, the combination of
low benefit _B _and leisure might be preferable to work at a higher
income.
We can overcome these barriers by going back to basics, i.e. to our
definitions. First of all, the bureaucrats are reminded that they are
there to serve the public cause (‘res publica’) - and thus they have
signed a contract - before they got the job - that they will welcome
full employment and raise no anti-POC objections. In the same way, the
people on the dole have signed a contract - before they got the benefit
- that they will accept a job at a living wage, and will not raise
anti-POC objections either.
A final observation is that the power elite, those who determine the
SWF, might enjoy unemployment of a section of the population for some
strange other reason. They might not care about the increase of income,
freedom and welfare from a change towards full employment, but they
would prefer the idea of people in helpless positions and the warm
gratitude they show for their benefits. A king needs subjects. We
resolve this problem by proper formulation of the theorem.
Concepts
Note that we use the symbols of chapter 39 (that forms a unity with
this chapter).
Above theorem on the technical possibility of full employment is
essentially incomplete. It has not been specified how the tax regime
comes about. The tax regime is an expression of the social choice
already made, but it has not been explained how a particular choice has
been caused. What is required is a power distribution on the _b + h +
l_ agents in the economy. In conventional terms the power distribution
is expressed as a social welfare function SWF, and the tax regime is
the result of the maximisation subject to the state of information _I_:
_ maximise SWF(h, H, N, l, L, K, b, B, t; I)_ (40.1)
Using a SWF serves expository purposes. When turning to practical
application we could use the Drissen & Van Winden (1990) approach. But
the logic of both approaches is the same.
The introduction of regime indicator _t _as a separate variable in the
SWF means that it stands as a proxy. The economy is not simply a
collection of individuals maximizing utility over consumption and
labour. There are some institutional aspects too. An example of an
institutional influence is that some social security officials might
benefit from unemployment, since it keeps them in attractive jobs. All
such (Public Choice) phenomena can be collected on their point of
relevance: the employment regime_ t._
Secondly, there is information _I. _Ever since Keynes and Tinbergen, or
even earlier, but for some economists more acutely since Muth and
Lucas, economists have given attention to the information sets that
guide the activity of agents. This concerns not just plain knowledge,
but rather what people believe about the state of the world. The
information sets may contain individual and social aspects, like own
prices and the (announced) general price level.
Variable _I_ is an aggregate. It represents the state of knowledge of
those in power, where ‘having some power’ is a state of nature given by
an array or by a distribution. The latter is not further developed
here. A basic point however is that if some economist would know how to
solve unemployment, but those in power don’t, then the budget set is
_IB,_ while _I < IB _- and those in power apparently prefer not to
know. [117]
The use of variable _I _could complicate the analysis in various ways.
R&D could be an economic activity affecting social welfare itself,
amending (40.1) etcetera. But the present formulation suffices for our
purposes. Note, the maximisation process itself finds its operational
implementation in the actual work of some agents in the economy. Such
work might be implicit and thus not explicitly remunerated. More
conventionally there are some administrators (e.g. a “Council of
Economic Advisers“) who are explicitly paid for their information
handling activities (often: whatever outcome on _t_).
Piore (1987) reminds us that unemployment is not a natural disaster
like an earthquake, but derives its cause, nature and significance from
the social system as a whole. In this line, when unemployment arises,
we would find the solution by studying the whole system. This includes
information. And Piore’s reminder, being a reminder, is a piece of
information. Indeed, one important social type of information concerns
theory itself, and economic models in particular. The development of
the theory of Rational Expectations (or model-consistency) implies this
too. Economic theories about unemployment are themselves part of the
information sets in society. An adequate description of unemployment
not only requires a statement of taxes, social security and e.g. legal
minimum wage, and their technical interaction, but also a statement of
people’s perceptions, of the theories in the journals, and of what
journalists and politicians make of these.
When unemployment arises, it may be caused by the power distribution,
but the cause can also be plain lack of knowlegde. It may very well be
that Piore’s proposition has not gotten sufficient attention from
policy makers and advisers. And this lack of attention, if it were
true, would be a prime example of the influence of the information set
on economic activity.
There are two relevant states of information: _I = _1 meaning that
those in power perceive of a (sound, compact) solution of unemployment,
and _I = _0 meaning that this is not the case. Note that knowledge
about the theorem on co-ordination, that is to be formulated next,
might but need not be included itself in _I = _1.
The Dissipation of Knowledge _I _by science, education and media need
not be detriment to those in power, but it might be. In the latter case
_I _would not be POC in the ordinary sense. However, many would hold
that _I morally _dominates POC - and if these people are in power,
then this conviction is reflected in the SWF. Note also that _I _need
not be positive, e.g. when a wise king dies or a wise government party
loses the elections. Note that when _I _coincides with a shift in
power, the prime cause can be both personal properties involved or the
information; but here everything is aggregated into the latter.
We conclude this section by a short abstract discussion of the concept
and properties of information, and Lemma III.
Regard a controlable dichotomous system with states _s = _0 or_ s = _1.
Two consecutive states are of the form {0, 0} and {1, 1} where the
regimes are maintained, and {0, 1} and {1, 0} where there is a switch.
If policy is conscious, then the movement from one state to the other
(or the same) depends on information - and thus there are four lists of
basic information. With 4 such items, an agent’ mind can possess any
combination. There are 15 of such combinations: namely 1 case where all
4 are known, 4 cases of only 3 items, 6 of 2 items, and 4 cases when
only 1 is known. It will be useful to compress this abundance.
The following definitions are useful:
Definition: Basic information is a _list_ of “what one does” to
have one state in one moment and another state in the next moment. An
example list is: {“Provide oxygen and a dry place”, “Light the match”,
“Let it burn till it is all cinders.”}. Other examples are recipes,
film scripts, computer programs (“Click on a button”). We can denote
basic information as _BI_(_s_1, _s_2). Note: In this version of the
proof we allow basic information to be true or false.
Definition: A state _s _is said to be _controlable _iff there
exists - in principle - _true_ basic information on both _s _and _1-s,
_and the agents have the resources to use this information. Note that
this information need not be known by the agents (need not be
available), and it need not even be known to the agents that the matter
is not unknowable.
Definition: Information is _available_ when at least one agent in
the economy has it. (This is stronger than the ‘existence in principle’
of controlability.)
Definition: Sound information _J(s)_ is a list of _both _what one
does to maintain _s_ _and _what one might do to change _s_ into _1 -
s_, using _true_ cause and effect relations. Thus _J_(_s_) = _BI_(_s,
s_) _BI_(_s_, 1-_s_)
| truth. Denote an arbritrary belief as _J’_(_s_) - that however will
not be sound since it would not be necessarily true.
Remark: True information is sound when the information concerning {1,
1} and {1, 0} is joined, or if the information on {0, 0} and {0, 1} is
joined. One may e.g. know how to burn or not to burn a match, but not
how to restore cinders into a match again (except for restarting the
universe, but that is not likely controlable). Let 1 stand for match,
and 0 for cinders. Then _J_(1) exists, but _J_(0) doesn’t (only partly,
to maintain cinders as they are). Using sound information rather than
basic information has analytical advantage. A Roman emperor may think
that he maintains his good fortune by sacrificing to the gods. We
rather discuss cases where governments deliberately abstain from wrong
policies.
Remark: Consider the list {“If you happen to flip back to 0, use
_BI_(0, 1) to go back to 1”}. Can we classify this as _BI_(1, 1) ? We
could allow this if the cost of the temporary flip is low. For example,
riding a bicycle requires continual readjustment of equilibrium. We can
define _BI_(_s, s_) = {chance(_s_, 1-_s_)} _BI_(1-_s_, _s_) | truth,
as implied control information. But since this does not give
_BI_(_s_,1-_s_), the implied control information does not give sound
information. Stated differently, we are interested in durable states
_s,_ and not in flipping states. If we observe _s _then we want this to
be caused by deliberate rejection of the use of _BI_(_s_, 1-_s_). We
also regard cases in which implied control would be costly.
Definition: The tuple (_J_(1)_, J_(0)_, s_)_ _is the state of a
sound system. Note: Though the information is denoted as a function of
_s, _information in a controlable state is the prime cause and _s _the
prime effect.
Definition: Information is called _compact_ iff _J_(0) _ J_(1)_.
_Note: Compactness means that one knows the explanation of one state,
iff one knows the explanation for the other state. Then we can use a
single variable _J _or _J’._
Definition: A state _s _is said to be caused _by chance _iff a
situation of _s _and unsound belief _J’(s) _are stable. It is said then
that there is a _hidden cause_ linking _J(s) _to_ s._
Definition: If the sound information concerns a model then we can
denote _J_ in binary values, with 1 = ‘the model is known’ and 0 = ‘the
model isn’t known’, rather than use the whole list of statements. With
binary information, compactness _J_(0) _ J_(1)_ _becomes _J_(0)_ =
J_(1)_._
Remark: Consider the example of the Roman emperor. His model is
‘_sacrifice fortune_’ (and if fortune slips after a sacrifice, then
apparently more sacrifices are required). One of his basic informations
is _BI_(_~fortune, fortune_) = {‘_sacrifice fortune_’, ‘In this case
sacrifice’}. Since _J’_(1)_ J’_(0) this is a compact belief.
Remark: If _s _is the case, and one doesn’t believe _J_(_s_)_, _so that
_J_(_s_)_ _= 0_,_ then one believes some alternative _J’_(_s_). Someone
unfamiliar with matches would have the unsound (perhaps only basic)
information ‘this is just a piece of wood’. More complex situations
need thorough analysis. E.g. someone may know the text of a theorem and
benefit from that, but may not know its proof.
Lemma III: If there is sound information (_J_(1)_, J_(0))_ _on a
controlable dichotomous state _s,_ then:
(i) if the information is not compact then there are 8 states of the
system, with 4 states implying a hidden cause,
(ii) if the information is compact, these numbers are halved.
Proof:
We tabulate the possible states of the system (_J_(1)_, J_(0)_, s_) in
Table 16.
In cases (rows) (3), (4), (6) and (7), the agent doesn’t possess sound
information and believes some _J(s) _(e.g. ‘the world is as it is’),
but he chances at _s_ nevertheless. This implies that there is a hidden
cause. (For example, the state of the system was inherited, and the
agent wishes to keep things as they are. In that case (_J’_(1)_,
J’_(0)_, s_)_ _has causality within a more complex model, describing in
more detail how people act on their beliefs.)
If the information is compact, we only consider states (1) to (4).
Q.E.D.
Discussion: To understand the proof, look for example at row 6: There
is a true model for sequential states {1, 1} and {1, 0}, or to maintain
1 or change to 0. But nothing is truly known about maintaining 0 or
changing back from 0 to 1 (though beliefs can exist). Observed is _s_ =
0. Perhaps it once was a conscious choice to go from 1 to 0, and
perhaps one uses the implied control {chance(0, 1)} _BI_(1, 0) |
truth. But we are concerned with durable cases for which implied
control would be costly. We want to see deliberate rejection of the use
of _BI_(0, 1). But this information is not present. Hence the endurance
of 0 is caused by chance.
Table 16: States of the system
_J_
_J_(1)
_J_(0)
_s_
_meaning_
(1)
1
1
1
1
given _J_ = 1
one chooses
_s =_ 1
(2)
1
1
1
0
given _J_ = 1
one chooses
_s =_ 0
(3)
0
0
0
1
given _J_ = 0
one chances at
_s =_ 1
(4)
0
0
0
0
given _J_ = 0
one chances at
_s =_ 0
(5)
-
1
0
1
given _J_(1) = 1
one chooses
_s =_ 1
(6)
-
1
0
0
given _J_(0) = 0
one chances at
_s =_ 0
(7)
-
0
1
1
given _J_(1) = 0
one chances at
_s =_ 1
(8)
-
0
1
0
given _J_(0) = 1
one chooses
_s =_ 0
Note that a conscious choice is made when one does not use
the information to switch to the other state.
The special theorem
When we apply Lemma III, which is about information handling in
general, to our subject matter of employment, we get what for this area
amounts to a theorem. The first theorem is special since it assumes the
BHL property.
Definition: There is wrong co-ordination if a SWF optimal change is
blocked only by ‘lack of knowledge’ of the power elite while the
information actually is available. (Co-ordination can go wrong on other
counts too.)
Theorem BHL.2: Given theorem BHL.1:
(i) full employment results from conscious choice or chance
(ii) unemployment results from conscious choice or from wrong
co-ordination
Proof:
Theorem BHL.1 shows that full employment for the BHL welfare state is a
controlable dichotomous state. The theorem is sound and compact. Thus
Lemma III applies.
Possible states of sound compact knowledge and employment _(I, t)_ are:
(1) (1, 1): having the knowledge, full employment results;
(2) (0, 1): lacking the knowledge, full employment results; thus
there is a hidden cause; thus it is by chance;
(3) (1, 0): having the knowledge, unemployment results; thus,
the explanation comes from the power distribution, so that full
employment is not to the advantage of those in power, and the choice
for unemployment is conscious;
(4) (0, 0): lacking the knowledge, unemployment results. Note
that theorem BHL.1 is available knowledge (e.g. it was published by
Colignatus (1992b, 1995a, or this book)). [118] Where we currently
speak about ‘lack of knowledge’ then we mean the knowledge of the power
elite, who do not fully use the knowledge budget set. Introduction of
theorem BHL.1 into the knowledge bank of the power elite unveils two
subcases:
(4.1) There is a switch to (1): optimal change was blocked only by
lack of knowledge, while the information actually is available: hence
wrong co-ordination;
(4.2.) There is a switch to (3): information doesn’t matter.
Q.E.D.
Remark: In both employment regimes we have ‘conscious maximizing
behaviour subject to the state of information’, but the regimes cause
different conditions. There is little use in subdividing case (2). If
more information is introduced, then the power distribution may cause
unemployment. This effect however has already been covered in (3). See
the note “more on chance”.
Remark: Cases (3) and (4.2) give the situation where the possibility of
full employment merely is logical but not empirical. It is conceivable
that power parameters and political reaction patterns are such that the
economy remains in a state of unemployment forever.
Remark: In case (4.1), and when there are subpopulations of theorists
(‘those who know’) and policy makers (‘those who can do’) then there is
the _Van Schaaijk Corollary: _“Those who know, cannot do anything about
it; those who can, don’t know.” The addendum here is that ‘not-knowing’
is no excuse for a policy maker who should know.
There remains the interesting point of the potential difference between
Pareto Optimality and SWF optimality, when information is the active
variable. One may remember the bureaucrats in their plush jobs and the
benefit recipients who enjoy their leisure. Here Lemma IV applies.
Definition: A situation is _Properly_ Pareto Optimal (PPO)
compared to an alternative iff it would be PO when some conditions are
properly defined and interpreted - while it seems non-PO when these
conditions are ill-defined and wrongly interpreted.
Lemma IV: For a BHL economy, regime 1
(i) has the highest level of national income,
(ii) is PPO compared to regime 0.
Proof:
(i) Equation (3_-t_) immediately implies _Y_(1)_ Y_(0)_._
(ii) Regard the change from 0 to 1:
(B) permanent benefit recipients are not affected by a regime
switch,
(H) _N_(1)_ N_(0)_,_
(L) _K_(1) _ B._
Hence all agents improve in a material sense. Thus regime 1 is PO
compared to regime 0, if we restrict_ _attention to these income
aspects. The actual choice is made by the SWF, and this choice includes
power effects of the bureaucrats (who may want to maintain
unemployment) and the unemployed (who enjoy leisure while on benefit).
This contorted SWF can be cleaned up by proper contracts and execution
of those contracts. Then PO is restored.
Q.E.D.
Remark: It stands to reason that if a change to full employment occurs,
it is mainly because it is POC. This highlights the problem of wrong
co-ordination.
Remark: In normal work-ethic conditions, the income-leisure utility
considerations of the _l_ low productivity workers improve too, when
they move from forced leisure to a decent job. It is conceivable
though, that the advance in net income does not compensate for the loss
of leisure. Therefor, the concept of PPO is useful. In another respect,
the voting power of _l_ may be small, and when society decides that
unemployment was a silly affair, the _l_ may be said to have had an
unintended bonus while it lasted. (Society might even try to recover
that bonus.)
Remark: There is scope to define and judge PO from some fundamental
rights rather than from the actual bureaucratic flux.
Remark: In an applied general equilibrium context we would have to deal
with complexer aspects, like people fearing to lose their jobs, and the
loss of income resulting from crowding out. Adding ‘approximately’
would help Lemma IV surviving.
The general theorem
Definition: There is wrong co-ordination if a SWF optimal
change is blocked only by ‘lack of knowledge’ of the power elite while
the information, though not yet available, still could be found rather
quickly by not much effort. (Co-ordination can go wrong on other counts
too.)
Theorem G.1: If full employment is a controlable dichotomous state
for which sound compact information exists in principle, that also can
become available rather quickly by not much effort, then:
(i) full employment results from conscious choice or chance
(ii) unemployment results from conscious choice or from wrong
co-ordination
Proof:
Work along the proof of theorem BHL.2. Note that BHL.2 fills in the
properties that are now provided by hypothesis: controlability,
soundness, compactness, and availability. Note that controlability
means that the information exists in principle, while it need not be
available yet.
Q.E.D.
Remark: Theorem BHL.2 thus gives an existence proof for this general
theorem, i.e. shows that it is not vacuous.
Remark: The value of the theorem is that it focusses our attention on
the perceptions that we have to deal with when judging the arguments in
this book. Some questions to be answered are: (1) Do we still believe
in full employment (only friction unemployment), or do we think that
there are serious bottlenecks - or do we even think that we live in a
probabilistic universe ? (2) Do we seriously believe that governments
have done their best, or at least a reasonable effort, for (a) using
available information, (b) finding additional solutions ? (3) Do we
really think that the BHL-concept is useless, and that governments have
been right to neglect the papers on them ? (4) Do we seriously believe
that the PO-changes that seem so likely, are _not_ POC ?
On the interaction of the reduced form theorems
Our analysis has not provided complete statistics on existing welfare
states, and it can neither replace the need for more study, especially
with the cornucopia of applied general equilibrium modelling. The
analysis here does however fit in with the stylized facts. It is good
strategy to apply logic to circumvent the uncertainty of parameter
estimates. There is sufficient reason as well to accept that the two
propositions forwarded here give main results in a nutshell.
The first proposition is that both unemployment and full employment are
possible for the (BHL) welfare state. The second proposition is that
unemployment follows from either conscious choice or wrong
co-ordination caused by (deliberate) lack of knowledge, and full
employment from choice or chance.
It may be emphasized that the logical force of the argument derives
from the undeniables both that one can take subgroup averages and that
two points share a line. That line finds its translation, in economic
vocabulary, of a social welfare function with a power interpretation.
Above discussion on information is a small step in formalising rather
well-known insights. Formalisation, how small the step may be, can be
crucial to get the statistics going, and in helping to establish what
the state of the world actually is. Apparently we need statistics on
what economic advisers and policy makers believe.
Above discussion provides a foundation for a policy conclusion, that it
would be good for many welfare states with declared objectives on full
employment to improve on informational procedures.
More on chance
The mentioning of ‘chance’ in the lemma and theorems induces a short
discussion on randomness.
Let Queen Q fall in love with Prince Random PR. Q especially adores PR
when he goes about the court with an attractive air of responsibility.
To this end she gives him the job of Treasurer. However, PR does not
know much about taxes, and true to his name he chooses tax exemption at
random. Hence, any regime is ‘subject to approval by official royal
authority’, and in this sense there is a SWF and maximisation. And only
economists think that the economy or economic theory are relevant. On
the other hand, this is an incomplete sense of optimality. If PR
happened to choose regime 0, then teaching PR about taxes would have
Pareto Optimizing effects. In this sense, only one case is really
optimal. This example shows that we can discuss cases with random
elements, and that we can maintain our classification of cases. In
fact, _Y_(1)_ - Y_(0) would be the ex post implicit price paid, in
regime 0, by the Queen for decentralizing decisions to a nitwit. If PR
has ex ante probability _p _of choosing regime 0, the ex ante expected
loss is (1_ - p_).(_Y_(1)_ - Y_(1))_ + p_.(_Y_(1)_ - Y_(0))_. _It is
not very useful, however, to indulge in the notion of randomness, when
considering the theorem. The stylized fact is that it is the
(deliberate) lack of knowledge that is crucial here.
Book X
Conclusions
Some of the conclusions can be best understood in relation to the work
of others. There are two sets of authors: those who take a general
position and those who concentrate on the poverty issue.
41. Relating to Mankiw’s “Principles”
Mankiw (1998)’s “Principles” textbook is becoming a corner stone in the
education of economics - and very understandably so. As a teacher I
would likely prefer this book myself too. It will be clear, however,
that Mankiw’s book does not mention many of the fundamental points made
here. This makes that one would wish, and in a sense should predict,
that Mankiw adapts his text to them. My own suggestion however is that
we allow students the advantage to better appreciate the gap between
economic thinking ‘before’ and ‘after’ the current new analysis. Such
appreciation will be an asset to their historical perception and
understanding of the role of economics in society. So, buy both
Mankiw’s book, as it is now, _and _this book, as a package deal.
Discussing income redistribution, Mankiw states: “(…) here we digress
from economic science to consider a bit of political philosophy.”
(p431) Tinbergen, Keynes, Marshall, Mill and Smith turned in their
graves. Income redistribution and the underlying philosophies are a
topic of Political Economy - and thus they still are economics !
Mankiw himself states: “When the government enacts policies to make the
distribution of income more equitable, it distorts incentives, alters
behavior, and makes the allocation of resources less efficient.” (p421)
and “The more equally the pie is divided, the smaller the pie becomes.
This is the one lesson concerning the distribution of income about
which almost every one agrees.” (p441).
I find these statements problematic. The matter is put in a binary
‘pro-con’ manner. The same approach happens in the back of the book,
when the student is confronted with ‘pro-con’ questions. Such an
approach in itself stimulates debate, but decisions in reality are
subtler. A ‘pro’ view can change into a ‘con’ view if a tax rate
proposal differs by only a percentage point.
For the income distribution:
First of all, even if the pie would be smaller, the system still would
be efficient. Mankiw uses the word ‘efficiency’ incorrectly, mixing up
growth with efficiency, and stirring up adverse feelings against income
redistribution by using a wrong accusation.
Secondly, indeed, if all incomes were equalised - as even the communist
parties of Russia or China didn’t and don’t succeed in doing - the pie
could get noticeably smaller. However, for the practical measures we
are talking about - in the 40% - 60% range for the marginal rate - the
change might not be that relevant. There are not only disincentives for
the rich, but also incentives for the poor to participate in society.
There are so many other effects. Alleviating poverty, by getting people
into jobs, could reduce the crime problem. Or, a rich person may decide
to work less and spend more time on a hobby or with the kids - and
might find out that he or she is actually better off. The prime
comment, and the prime economic observation, is that the pie itself is
relevant, but the social utility derived from it is even more relevant.
If a democratic, Madisonian, society decides to redistribute income,
that itself is evidence and proof that it moves to a superior welfare
position.
It is true that a rich person may earn $100,000 per annum and can be
outraged by a 40% or 50% tax on it, claiming that society steals it.
Strangely, while governments spend so much energy in monitoring the
poor, they are quite reluctant to calculate the benefits going to the
wealthy. The value of industries depends upon government regulations.
The value of city property is also caused by public investments. What
we earn now, depends so much on what our ancestors have been doing. It
is truly difficult to determine what our own personal contribution is.
The $100,000 earned are only the proceeds from a market situation - but
the market is an amoral beast, and not a god of justice that allocates
what people ‘deserve’. And thus, having such a marginal tax rate could
well be one of the necessary ‘rules of the game’ to create a both
prosperous and civilised society.
Mankiw shows an awareness of this on some pages, but not integrally so.
On the subject of designing an incentive compatible tax system, he
states: “Thus, policy makers face a tradeoff between burdening the poor
with high effective marginal tax rates and burdening the taxpayers with
costly programs to reduce poverty.” (p440).
Well, indeed, this is the current view among economists - that this
current book shows to be wrong.
Mankiw’s discussion on GDP seems rather balanced. Yet, for all his
caution, he still seems to favour GDP as the “the single best measure
for welfare”, or “a good measure of welfare for most - but not all -
purposes” (p490). I think that the latter still is unwarranted, and I’d
rather would favour the conclusion: GDP is a crude measure for income -
and I would keep some distance from welfare implications.
Mankiw (p490) tries at a short ‘international comparison’, and shows
that GDP per capita ‘tends’ to associate with a higher life expectancy.
However, he uses India, while Sen (1998:47) - discussed below - argues
that the substate of Kerala (30 million people - twice as many as
Holland) is quite different. Table 17 gives the 1993 data of Mankiw and
the 1994 data of Sen (read from the diagram). In short, the ‘tendency’
that Mankiw notes is much like the ‘storks and babies’ regression - if
the data are right.
Mankiw p515 slips into a ‘summary statement’ that textbooks are
inclined to provide but rather should avoid: “Richer countries have
more automobiles, more telephones, more televisions, better nutrition,
safer housing, better health care, and longer life expectancy.”
Table 17: GDP per capita and life expectancy
US
India
Kerala
GDP per capita
$24,680
$1,240
$500
Life Expectancy
76
61
73
Why, oh why, argue that a GDP measure can do more than it can do ? Why
create the suggestion that governments employ sufficient numbers of
economists, and that we don’t need loads more ?
Mankiw’s discussion would benefit from reading Hueting (1980) and P.
Dasgupta & K.-G. Mäler (1999) on the environment. And on the causes for
famines (p531) he could also benefit from a closer study of Sen’s work.
Perhaps there could be another ‘principle of economics’ here.
I would think that a ‘principles’ book should contain explanations of
‘ex ante’ and ‘ex post’ and of ‘animal spirits’. Perhaps I am European
and perhaps I value a historic sense, but I really don’t understand
that Mankiw does not used the ‘ex’s, and only mentions ‘animal spirits’
on p722 without explanation. [119]
Similarly, I don’t understand why Mankiw adopts the word ‘natural rate’
and then explains that there is little ‘natural’ about ‘natural’. Is
this not obviously a stupid and ridiculous way of teaching ? Let us
please ditch the word, and use ‘system rate’ (or rather CWIRU as
above). Note too that Mankiw’s ‘explanation’ on p566 that the system
rate of unemployment “does not go away of its own” is awkward, since
the economic system is heavily regulated, and events hardly ever are
“of their own”. There are always people taking decisions.
There are some points on indexation. (1) The productivity slowdown - US
output per hour dropped from 3.2% per annum in 1959-1973 to 1.3 % per
annum in 1973-1994 - is related to GDP per capita, and this is
dangerous, while it should be simple to include hours in the latter
graph. The explanation for the slowdown remains in the air - and I
would like to see mention of lower investments (due to lower profits
and inflation uncertainty in the 1970s, and high real rates of interest
since). (2) Mankiw does not provide much light on the ‘CPI correction
problem’. His p504 chart on GDP and CPI does not really clarify how
Alan Blinder can come up with a correction of -1% per annum on the CPI.
While the CPI of course is important for understanding the situation -
e.g. the productivity slowdown and the Fed’s inflation policy ! I
should mention that I, at this moment of writing, am indeed in doubt of
what to think about this American problem - and I am pretty alarmed by
this insecurity. We should consider this a major failure of economics
(or of government to provide for sufficient numbers of measurement
officials). (3) On p544 we see the Dow Jones and S&P indexes mentioned,
but not explained, while freshmen economists should be taught to laugh
about the Dow Jones index - see also Bernstein (1996). (4) P404 gives a
graph of the US ratio of earnings of college graduates to earnings of
highschool graduates, and the ratio goes from about 1.6 in 1975 to 1.85
in 1995. Mankiw’s graph looks dramatic, because of the chosen axis -
and the graph thus should be redrawn with a normal axis.
Mankiw (p502) states: “Congress could change the Social Security
program so that benefits increased every year by the measured inflation
rate minus 1 percentage point. Such a change would provide a crude way
of offsetting the measurement problems and, at the same time, reduce
government spending by billions of dollars each year.”
What kind of argumentation is this ? Well, we could also slash all
Social Security: and also get rid of the measurement problem and save
billions more ! Pity the US, with all the students who have only one
course in economics, and then get Mankiw’s “Principles” !
My own analysis shows that indexation on income is rather more
advisable.
Where Mankiw discusses the labour market (e.g. p565), I miss the ILO
dictum: “Labour is not a commodity”.
Mankiw’s final chapters give an overview of macro-economics. I have
some doubts on this presentation, in particular where macro demand and
supply curves are made price sensitive - while Keynes showed that the
aggregate price is rather an income. Anyway, my own present book itself
is an amendment on economics.
It remains interesting to note Mankiw’s statement on p574: “It is,
however, important to note why minimum wage laws are not a predominant
reason for unemployment.” Well, they are - and they can have large
multiplier effects.
42. Relating to Krugman, Phelps, Ormerod and Heilbroner & Milberg
Krugman, Phelps, Ormerod and Heilbroner & Milberg have produced
forceful analyses on the current state of the economy, society and
economic theory itself, and all with a distinct attention for
unemployment. These authors agree on many points, but disagree on major
points too. Interestingly, where these authors disagree, my own work
offers new answers, on angles clearly not considered by them. My
analysis solves conflicts, fills gaps, and complements on useful
points. By relating my work to theirs I hope to enable these authors
and their readers to plug into - what I consider - a new synthesis for
(a renewed) mainstream economics.
Introduction
Mainstream economics appears to accept high rates of (equilibrium)
unemployment as the apparent characteristic of the modern economy. In
this view, unemployment is not inefficient, but the unavoidable price
to be paid for other desirables. Take for example the case that the
United States has low welfare provisions, less unemployment but more
poverty and many prisons, while the European Union has high welfare
provisions, high unemployment, less poverty and far fewer prisons:
these differences then are explained in terms of political choices for
example about institutions, labour market flexibility and
employability; and it is suggested that such choices are made at the
efficiency frontier. Research economists however are more focussed on
the question whether current policy really is optimal and whether
current unemployment is really (in-) efficient. The search is for a
Pareto improving solution such that some can advance - notably the
unemployed and the poor (underemployed) - without costs to the others.
Specifically, Paul Krugman, Edmund Phelps, Paul Ormerod, Robert
Heilbroner & William Milberg) and myself have tried to supplement the
mainstream approach. The first authors have received a lot of
attention, but did not succeed in finding a Pareto improving solution
to current unemployment. My analysis has received little attention,
though I must confess that I did find such a solution.
In the following I’ll concentrate on the major issues, and then refer
to that part of my own work that links to the work of these authors.
Review of positions and qualities
The other authors and myself have come up with different answers on the
causes for and solutions to current unemployment. Table 18 reviews the
different positions.
We may also note that most authors do not (explicitly) refer to each
other. The reason for this may be practical, in that books that appear
in 1995 may have difficulty to refer to Phelps (1994). We may also note
that even though the inflation-unemployment relationship is crucial to
the analyses of all, the focusses differ. Disagreement often leads to
neglect rather than to explicit criticism, and it may well be that I
have selected top scorers of different citation communities. However,
all authors may be justified in neglecting one another. No one of them
gives an essential contribution to the understanding of current
unemployment. Theoretically their work might be skipped, as I did in
practice while developing my analysis.
Table 18: Different positions
_ _
_Causes and solutions on unemployment_
_Refers only to_
_Myself_
Taxes & the Trias Politica structure
Phelps (1994)
_Krugman_
We don’t know
Phelps 1967-70
_Ormerod_
Moral values & collective responsibility
_Phelps_
Subtle combination of turnover costs etcetera
_H&M_
Lack of a positive ‘vision’ of the public sector
Phelps 1967
At a lower level, when we look into details, then there are more points
of overlap. An analysis of a practical economic problem (in this case
unemployment) of course must have an econometric substratum in order to
be taken seriously. Table 19 contains three technical issues, the shift
of the Phillipscurve and the influence of technology and globalisation
in the model. Here economics would advance if the authors could
convince each other (allow me to add: of my analysis).
It also appears that some of the differences originate from the _styles
_of analysis, which styles also have to do with roots. Ormerod, Phelps
and myself have econometric roots, Krugman’s first love was history
(see Krugman (1993)), and Heilbroner is clearly a literary economist
(‘though’ summa cum laude, Harvard 1940). (I don’t know about Milberg.)
It is important to identify these styles.
I like to use econometrics in the way Jan Tinbergen did. It should be
technically sound, but not fancy for reasons of its own; it should be
relevant for a serious problem, and communicated to the general public
in a responsible, modest but still clear manner (even if clarity makes
it sound immodest). I also am very much interested in philosophical
aspects (what H&M calls the ‘vision thing’), which however is not quite
the style of Tinbergen. It appears that the various authors do not
share all these qualities in the same degree. Taking these criteria to
classify the four authors and myself gives Table 19. The names in the
table are in alphabetical order. Actually, Table 19 summarises the
discussion below.
Table 19: Comparing on style and content
_ _
_Yes (comparable to me)_
_No (not so)_
_econometric roots_
Ormerod, Phelps
Heilbroner, Krugman
_technically (fairly) sound_
Krugman, Ormerod, Phelps
Heilbroner
_modest & clear_
Krugman
H&M, Ormerod, Phelps
_the vision thing_
H&M, Ormerod
Krugman, Phelps
_technology isn’t the cause_
Krugman,[120] Phelps
H&M, Ormerod
_globalisation isn’t the cause_
Krugman
H&M, Ormerod (Phelps ?)
_uses a shift of the Phillipscurve_
H&M, Ormerod, Phelps
(Krugman ?)
Krugman: “We don’t know”
The world should be very grateful to Paul Krugman for explaining
economic essentials, and not only for these explanations themselves but
for his choice of words as well. Krugman’s writing are a display of
fact & logic and scientific argument and humour & good will: a quality
blend that one hardly ever sees. I can only presume that you have read
these books, [121] and then continue my line of reasoning.
My thesis differs from Krugman’s in one major respect. He claims that
_“we don’t know”_ about the causes of the productivity slowdown -
whereas I claim that ‘we’ do. [122]
The following Krugman quotes are useful - and testify of his
intellectual honesty:
1. “I find that almost anything having to do with taxation is better
than a sleeping pill”. Krugman (1993)
2. “But let me cut to the chase: the real answer is that _we don’t
know_.” (1994b, p5, his italics)
3. “The key objective of the supply-side tax reduction was to lower
marginal rates, that is, the rates that people pay on any additional
income they make. That makes economic sense: marginal rather than
average rates determine the incentive to work and invest.” (1994b,
p155) Comment: I have shown this to be false.
4. “I’m not an expert on taxes.” (Said in a public exchange
following his Tinbergen Lecture 1996, to be published by the Dutch
“Koninklijke Vereniging voor Staathuishoudkunde” - Royal Dutch
Association for Political Economy)
These points are relevant for understanding:
1. See my analysis on taxes.
2. Krugman (1994a) makes a big issue of productivity.
Comment: Quite correct.
Note that I am rather sure about the explanation of and cure for the
productivity slowdown, but that my certainty derives from mathematical
proof and trained intuition, and not from an econometric model exercise
on the (world) economy. My analysis does not invalidate what others
have said on the shift to the service economy - and the difficulties of
measurement - etcetera, while I also present relatively new insights.
One of the ideas that I would have liked to look into, but have had no
time for, is, that the return on consumer investments (like home
improvement for the elderly) may be larger than that on financial stock
(“savings”), and that this return is not adequately accounted for (also
as a tax base).
Another idea, also emphasised by Phelps, is that real rates of interest
are high (anyway). A major cause is that Central Banks have to be
tough, given the reduced competition on the labour market. Another
cause is that government doesn’t dare to raise marginal rates given the
current misconception about taxes; so governments borrow (at a higher
rate) what actually should have been taxes. Subsequently, investors buy
government bonds and grow lazy and spoiled about taking risk (that
otherwise would have spurred productivity). [123]
3. Krugman (1994b) p186 onward discusses East Germany and its
relation to the downfall of the European Monetary System. The story is
familiar: the then-existing policy paradigms of the EMS forcing a
recession in Europe when Germany raised its interest rates. Krugman
suggests that exchange parities should have been adjusted before the
markets forced this. He suggested that preoccupation with fixed rates
seduced policy makers to adopt the Maastricht Treaty on the EMU: “(...)
by early 1993 political and economic stresses had made the solemnity of
Maastricht seem almost comic. If there is a lesson here, it is that
serious and dignified men and women in impressive international
meetings may have absolutely no idea what they are talking about.”
(p192).
Comment:
This is too quick. When Germany decided that wage earnings in the East
should be equal to those of the West (to reduce migration), it should
also have decided to let wage costs reflect productivity. This is a
better approach than parity adjustment; and known at the time, see my
work and the Financial Times editorial “Time for Mr Kohl to act”, July
26 1991.
In the same way, EMU can still aspire at monetary stability, and this
can be done when countries use their tax structures (thus, structure as
opposed to level only) to balance wage costs with productivity. Even
though EMU is not a logical beauty, and East Germany still suffers from
a wrong policy mix, the gut feeling of EMU - one economy, one means of
payment - was admirably correct. This is even clearer given my work on
taxes and their influence on wage costs.
Note that many top economists make fun of EMU instead of providing
answers of how to deal with the policy challenge. This is not so
professional.
One possible answer is the following. With one rate of interest for the
EMU territory, and rates of inflation differing by regions (countries),
real rates will tend to differ. Some markets will be interested in the
real rate instead of the nominal rate. So loans indexed to the local
inflation rate might suit many, for example Dutch government and Dutch
pension funds, for part of the portfolio.
The following points are only interesting:
1. Krugman makes a point that income developments are fractal.
Laywers get much more than cleaners, but top lawyers get much more than
average lawyers.
Comment: Ditch ‘fractal’. It still is a lognormal distribution.
2. Krugman (1994a & b, 1996a) suggests that international influences
are less important, due to the size of proportions, than commonly
thought. Yet, he himself (1996b) comes with the ‘parable of clocks’:
international fluctuations may get into phase, similarly like clocks.
Comment:
So, though fluctuations may only be the cream on top of fundamentals,
there still is a new research topic.
Note too that the Great Depression and the Great Stagflation were OECD
phenomena and more than ‘cream on the top’; these may be traced to the
Trias Politica.
3. Krugman (1993): “I had some trouble getting that paper published
- receiving the dismissive rejection by a flagship journal (the QJE)
that seems to be the fate of every innovation in economics”.
Comment:
My experience is the same. People in responsible position have the
awkward tendency to start criticising before asking questions. They
fail to see that their criticisms can be formulated as questions -
which then are a reason for publication. And they are insulated against
protest to this injustice. I recently came upon some beautiful comments
by Bellman (1968) on the evolution of scientific ideas. Note, though,
that Krugman’s wonderful books since 1990 have only been made possible
since my analysis has been blocked from general attention: so that is a
form of comfort.
4. Note: With respect to Table 19, I’ve hesitated about classifying
Krugman as having less roots in econometrics. His credentials as a
technical economist are quite adequate. But, my experience with
econometric modelling has been extensive and will not easily be copied.
Also, I don’t particularly like the topic of taxation myself either,
but it only by going through the details of a complete model (too) that
I came upon that explanation. Though, Paul may make me regret this
classification.
Addition 2004: Krugman (2001), “Fuzzy math”, and particularly (2003),
“The great unraveling”, are advised reading for anyone who wants an
enlightened view on the world economy. Yet, Paul Krugman has not yet
benefitted from reading the analysis in these pages, and the reader
must make amends for that.
Phelps: “Structural slumps”
Phelps (1994) is as creative as the others, but also the technically
most advanced author who also presents econometric tests for some of
his conjectures. His book is impressive.
My first reaction in 1994 to Phelps’s book was guided by his
explanations in plain English. Given those explanations, his study
dropped in my priority list. My attitude is (in line with Tinbergen and
Keynes) that substance comes before technique. So it may come as a
surprise to the reader that I as an econometrician did not jump to the
occasion to comment on Phelps’s techniques and tests. But of course,
had I had more time, I would have studied those pages too. And of
course it is still appreciated that Phelps has produced these technical
pages. They have affected his style, and they allow for wider tests at
a later stage. Indeed, for the purposes of this chapter, I have looked
into the estimation sections more deeply. My comments below however
remain preliminary, since, indeed, I have not fully read all chapters.
The major comments are:
1. Phelps (p374-375) is sceptical about how politicians abuse
economics, and about how economists themselves react to (new) ideas.
Comment:
Talk to Krugman, and study my analysis on the Trias Politica.
2. Phelps: “There is already a moral-philosophical case for
employment subsidies targeted at the low end of the wage scale to bring
the rewards for work not having a high scarcity value more nearly in
line with the requirements of econmic justice.” (p366) and he seems to
approve of proposals also made by Dennis Snower.
Comment:
I even show that these measures cost nothing and are Pareto improving.
Do you agree that there may be an ‘equilibrium’ in your sense, but
inoptimal ? (See below.)
3. Chapter 18 contains a ‘concise postwar economic history’.
Comment:
The reader is invited to compare that history with my amendment to the
Bruno & Sachs story.
4. Phelps catalogues monetary aspects as temporary (‘high
frequency’) and nonmonetary aspects as structural (see p4 and 335).
Comment:
I agree that it is valuable to look at nonmonetary effects. But the
major issue is the Phillipscurve, a relation between unemployment and
inflation, and thus it is difficult to neglect monetary policy. When
Central Banks have a wrong theory, and cause the rate of interest to
rise, then this should be in the model.
On page 314, the acceleration of prices (change of inflation) is
introduced in a Phillipscurve in an ad hoc manner.
Similarly, on page 329 the possible influence of Bretton Woods is
discussed, and Phelps remarks that this system allowed for adjustable
pegs - but then misses the point that the pegs were pretty fixed in
practice.
No doubt, Phelps will agree that the whole story contains both
elements.
5. Phelps uses the calculus of variations, and his marginal tax rate
is _ T(y)/ y.
_Comment:
This is proper in this theoretical development, but it should be
replaced by a dynamic marginal rate when the theory is translated to
the real world. In chapter 29 it is explained what I mean by this, and
it is shown that this dynamic marginal rate may be close to the average
rate.
Curiously, Phelps’s econometric exercise uses average rates (p 314 &
318), and finds a contractionary relationship. In a sense, this
supports my analysis, which allows lower average taxes and thus lower
unemployment. However, I think that the estimated equation is too
simple for the true model.
6. Turnover costs appear to be very effective in one of the major
models.
Comment:
That would mean that a simple subsidy would have huge effects. This
does not seem realistic. The huge effect comes - I surmise - from the
homogeneous labour assumption, and it is more appropriate to assume
heterogeneous labour.
7. “The shifts and long swings in unemployment are an equilibrium
phenomenon, not a matter of misperceptions or misforecasts and
consequent wage-price misalignments” (p vii). Phelps then uses “(...)
the _equilibrium_ case in the expectational sense of the term: the case
of _correct expectations_ about the course of the economy.” (p1)
Comment:
The Moon falling on and past the Earth - and expecting to fall so - is
a story of _disequilibrium_ and of _equilibrating forces_ but also of
_equilibrium_. What you use is just a matter of perception and of
words. More important is the inoptimality of present unemployment.
Phelps writes on optimality: “(...) much of what we measure as
unemployment reflects job rationing, hence is involutary and imposes
private and social net burdens (...)” (p viii, see also Phelps p9).
Thus note that there is another concept of the “natural rate” (NAIRU),
namely the market clearing rate.
Even when expectations are correct - even when happens what you predict
- then you can still be unhappy about that and look for change; and
thus there can still be forces towards the clearing rate. Fulfillment
of expectations is not the only utility that you are after. Phelps’s
emphasis on the expectations definition suggests that his analysis is
incomplete.
Inoptimality may also have causes in the political structure, a point
that gets less attention by Phelps regardless of his comment on
p374-375.
8. Phelps: “A worldwide increase of public expenditure (...) was not
found to be expansionary (...) The same is true of a worldwide increase
of public debt. (...) Prudence requires putting aside the Keynesian
approach for the time being in favor of taking up the structuralist
approach.” (p330)
However, the page before: “(...) the economy is so complex an organism,
so to speak, that it would be naive in the extreme to imagine that, at
long last, the true macroeconomic model of equilibrium unemployment
determination had been discovered. A question that permanently looms
over any such research as this is whether the results interpreted as
favorable to the theory are in reality the expression of some mix of
other theories, some likely to be old and some _not yet known._” (p329)
Comment:
I fully agree with the statement on page 329 but think the statement on
page 330 overdone. The body of neoclassical thought is too big and
strong to be replaced by a mostly ad hoc econometric exercise. This is
hubris !
For starters: government expenditures rose as a result of unemployment
benefit payments. So there is a positive relation between unemployment
and expenditure. Secondly, “Keynes” is much more complex than the
simple idea that deficits would reduce unemployment. Macro-economics
aspires at wise management of economic development, only occasionally
using deficits to reduce unemployment. (What politicians do, is another
story.) One needs a more complex structural model to disentangle the
various relationships, instead of a two-equation reduced form estimate
as Phelps does. [124]
Less important comments are:
1. “The natural rate moves!” (p vii)
Comment:
The book suffers from the emphasis on the novelty of this idea.
However, the nonconstancy is part of its definition, and this was not
so revolutionary, in 1994. For example, see Solow (1976). It was a
common notion to me in 1989/90 when I generated my analysis, and Phelps
(p xii) mentions a 1979 paper by Jeffrey Sachs. But note that the book
reflects a 20 year research project, e.g. Phelps discusses on page ix
early models of the early 1980s that assumed a constant NAIRU. So it
may well be that some researchers settled for constancy, and that it
was a struggle for Phelps to get rid of constancy; and we should be
tolerant of struggles like this. But, objectively, the emphasis on a
non-novel idea is out of touch with modesty.
2. The opposition of “structuralism” to “neoclassical” (p14-19) is
rather constructed, and not modest again.
3. “(...) historical evidence that unemployment is (or was)
trendless (...)” (p x)
Comment:
Agreed.
Note, though, that my analysis is that due to differential indexaton of
taxes and subsistence, there is a trend in a component of unemployment
(namely, minimum wage unemployment, and poverty (underemployment)).
4. On technology: “the theory averts any implication that secular
productivity growth puts the equilibrium unemployment rate on a trend
(...)” (p xi)
Comment: Talk to H&M.
5. “(...) the present study is the most comprehensive econometric
model of unemployment to date” (p 313).
Comment:
Well, there is Lawrence Klein’s Project Link, there is .... etcetera.
6. Phelps (p352) relates to Jude Wanniski, an ‘amateur fiscal
theorist’ who wrote ‘an interesting book’, and dismisses him as a
serious thinker. On p353 Phelps speaks about ‘professional theorists in
the supply-side movement’ without mentioning names.
Comment: See Krugman (1994b).
Note that the editorial of the Wall Street Journal of October 17 1995
quotes the then new Nobel Prize winner, Lucas: “I have called this
(...) an analytical review of ‘supply side economics’, a term
associated in the United States with extravagant claims about the
effects of change in the tax structure on capital accumulation. In a
sense the analysis I have reviewed supports these claims. In what I
view as conservative assumptions, I estimated that eliminating capital
income taxation would increase capital stock by about 35%. (...) I
believe we would be a better society if we followed their advice.”
Also, in 1999 it appears that the 1999 Nobel Prize winner Robert
Mundell has been the leading force behind that Reagan Supply Economics
programme - though he let Laffer take much of the credit.
Addition 2004:
Phelps (1997) is advised reading and usefully available on the
internet. It is short, eloquent, compelling. The reader comes away from
it for 99.99% convinced. My first impression was to support it also for
the remainder. However, there is the Keynesian point that investments
cannot be left to the market. There must be some macro-economic
management and an Economic Supreme Court to safeguard that management.
Phelps (2000:88) unfortunately states: “The extraordinarily low
unemployment rates in continental Europe in its “glorious years” from
the 1950s to the mid-1970s were the result of special circumstances”
This is either an open door, in that 1950-1970 are not the historical
average, or a misguided view that they cannot become the average.
Phelps’s (short) analysis of that period does not include the analysis
of the tax void yet.
Similarly, Phelps (2000:90) “It is now dawning on policy discussion, in
Europe and to some extent in America, that countries can engineer a
reduction of unemployment without a sacrifice of low-end pay or a rise
in low-end pay rates without a sacrifice of employment (or some of
both). This can be done by means of tax-subsidy measures that produce a
favourable shift of the inclusion locus. Already several countries have
introduced, some many years ago, fiscal programmes aimed to do just
that, though generally on a small scale and often targeted at
particular sub-groups in the low-wage population. Taking such a step on
a large scale – large enough to make a big difference – involves a
paradigm shift in political economy that some policy makers are not yet
ready to take.” This issue has been discussed by this author since 1989
and in this present book again and one would wish that Phelps got time
to read it.
Phelps (2000:99) “Such tax relief is seriously cost-ineffective next to
graduated employment subsidies owing to the way that personal income
tax liability is formulated. The budgetary cost of graduated employment
subsidies is only the disbursement of the subsidies to the firms
employing low-wage earners, since high-pay employees are ineligible for
such subsidies from the first euro earned, while an equivalent
disbursement of income-tax relief in the low brackets – for example,
the first $16 000 of annual income – will cost the government the loss
of tax revenue on all higher earners’ first $16 000.” This is
absolutely unfounded. See Figure 28 or Figure 29 that shows that this
is not the case. Furthermore, in a reduced form there is no difference
between tax reduction and wage cost subsidy, which means that they can
be translated into each other.
Ormerod: “Death of economics”
The book’s name _“The death of economics”_ is not inviting to serious
research. One may appeal to a _“The King is death. Long live the King
!”_ approach, and indeed Ormerod’s last chapter _“Economics Revisited”_
seems to suggest this. But this is so round-about and distractive ! Why
first make people believe that you want to get rid of economics, and
then tell them that you have a better economic analysis ?
This way of presentation also gives too much credit to decisions
makers. Politicians and economic advisers who believed in those
theories are presented as misguided persons, and victims of failing
theories of old. Just as anybody can make errors. However, the proper
story is that illusions and ideological views have been maintained in
the face of contradictory evidence, and against the advice of renowned
economists. Ormerod’s presentation obscures this evidence and its
meaning. The proper story, that Ormerod misses, poses the question of
reform in the structure of economic decision making.
Agreed
I agree with Ormerod: “The whole challenge of economic policy is to
shift the attractor points around which the economies move, and hence
the whole solution path of the economy over time.” (p208)
Disagreed
1. He claims that there is a new analysis of unemployment moving
around an “attractor” (that itself can move).
Comment:
This attractor is nothing else but the NAIRU. It is true that it can be
clarifying to shift from the conventional parlance to the parlance of
chaos theory, but it is not revolutionary as claimed. The same
immodesty as Phelps.
2. He defends the macro-economic approach, e.g. on using a rather
simple relation between inflation and unemployment.
Comment:
Defence is fine, but the correct approach still is based upon
micro-foundations.
3. Ormerod writes: “The distinguishing feature of chaotic systems is
that their behaviour is impossible to predict in the long run (...)”
Comment:
The word “chaotic” means “deterministic looking like random” in
mathematics. Above quote is only true for (systems of) equations with a
random term somewhere.
“Chaos” has the connotation “random” in the public mind, so it might be
best not to use the term in books for the general public.
Ormerod gives much attention to uncertainty, and the way that he
presents it carries with it the suggestion that nothing can be done
about unemployment. Though uncertainty is important to macro-economics
indeed, it however is not really relevant for his main thesis that
something could be done about unemployment. Quite tiring.
4. He claims that the 1950s were a special period of reconstruction,
in the sense that the success of these years is not easily repeated.
Comment:
In my analysis, the conditions of economic success can be influenced,
and similar results achieved again. The mood of optimism would follow
the results, rather than conversily (though there is feedback too, of
course).
5. Ormerod: “So what can be done ? One solution to the problem of
high European unemployment, for example, is work-sharing.” (p207) To
achieve this, he appeals to social values.
Comment:
But work sharing is not necessary (see my work in general), and less
easy to achieve anyway.
6. Ormerod: “But perhaps the most important point of all, linked
though it is to the underlying mathematics, must be stated in words,
for it is a question of moral values. The concept, rampant in the
free-market philosophy of the 1980s, that there is no such thing as
society is one which, if it is allowed to persist, will prevent the
creation of full employment regardless of the form which economic
policy takes.” (p211)
Comment:
There is little use in discussing whether there is or is no “society”,
since it would seem to be a matter of definition. If a government would
choose not to solve unemployment, then this should be accepted in a
democratic society. It is a different thing that we now can show a
solution to inefficient unemployment, since that is a matter of logic
and intellectual honesty.
H&M: “Crisis of vision”
Heilbroner & Milberg (1995) are very wordy and imprecise - and the many
words are used for hyperbole instead of exactness. It is very easy to
get irritated.
There are only a few points that I agree with, but even these points
are formulated vaguely and annoyingly, and my comments are guarded.
Also, to reduce the irritation, I only usefully comment mainly on
chapters 1 and 7:
1. H&M: “(...) Keynesian theory can be judged a success (... when
allowance is made for ...) bargaining power of labor.” (p57) and
“Stagflation has come to an end with the political and economic events
of recent years. The bargaining strength of labor in the advanced
industrial countries has been threatened in part by the rise of
international competition.” (p59)
Comment:
Advanced nations are ‘service countries’, and see Krugman on
“international competition”. Bargaining power is a very important
variable, but you go too fast on the impact of international
competition on that. [125] Taxes are neglected. With unemployment and
poverty so large, we are only at the low inflation asymptot of the
Phillipscurve, and stagflation is not dead yet. Strangely, H&M’s book
is motivated by social problems, but the problem is declared dead ! In
other words, they don’t see that their problems are caused by
stagflation.
2. “(...) the extraordinary combination of arrogance and innocence with
which mainstream economics has approached the problems of a nation that
has experienced twenty years of declining real wages, forty percent of
whose children live in “absolute” poverty, and which has endured an
unprecedented erosion of health, vacation, and pension benefits.
(reference) The commitment to full employment legislated in 1946 has
been “honored” in these socially destructive years not by vigorous
employment-generating programs such as the reconstruction of its
cities, but by redefining “full employment” as a higher level of
unemployment.” (p6)
Comment:
Agreed on the concern, disagreed on the rest. Do not mix up politics
with economics. See Krugman’s description of how policy fashions
drifted from economics proper. Also, there were serious questions
regarding the causes of unemployment, and these questions cannot be
played down so so easily and derogatory.
3. “It is the legitimacy of the public sector within capitalism that
lies at the core of the contemporary crisis of vision.” (p120)
Comment:
They are too vague on this, so they might as well be wrong. But agreed
in principle, see my advice to adapt the Trias Politica.
In general, H&M don’t clearly distinguish between economists as
scientists (who have all the time of the world to doubt) and economists
as policy advisers (who also have to take into account that decisions
have to be made here and now).
4. “(...) the mark of modern-day economics is its extraordinary
indifference (to the connection between theory and reality /TC). At its
peaks, the “high theorizing” of the present period attains a degree of
unreality that can be matched only by medieval scholasticism.” (p3-4)
Comment:
Yeah, for “peaks”: that may be. It is good we have those peaks.
“Analysis has thus become the jewel in the crown of economics. To this
we have no objection. The problem is that analysis has gradually become
the crown itself (...)”
Comment:
Well, that is an overstatement. Is the suggestion that all economics
now is a “peak” ? Besides, did you really look at the practical work at
the relevant institutes ?
H&M miss the point that my analysis is fine work in the mathematical
tradition, and that it is neglected by many (by him too). Rather than
downgrading all math, they should highlight the work that matters, and
state the reasons why it matters.
5. H&M see the following causes for unemployment:
a) “On the domestic front, they include a technology of rampant
automation that has created severe employment strains in all advanced
countries (...) The result is prospective increasing dependency on
government-financed programs of unemployment relief or public works.”
(p120-121)
b) “Meanwhile, on the international front, (...) “globalization”
of production carries unsettling implications for all advanced
capitalisms, including the lowering of social, environmental, and labor
standards (...)” (p121)
c) Other issues are volatility of financial flows, demography and
immigration, ecology and nationalism & terrorism.
Comment: This is bad economics. See Krugman & my work.
H&M’s book is recommended on the back-flap by Lester Thurow as
“essential reading”. They and their readers are advised to read Krugman
on Thurow.
There is a final caveat. With my European background it is easier for
me to see the value of government involvement, cost-benefit analysis
and policy analysis. I am not familiar with the American academic
situation, and it may be that H&M really have a case that these aspects
are underappreciated in the US.
Note 2000: I found P. Dasgupta (1998) also criticising Heilbroner. My
problem in this discussion is that both authors do not adhere to the
definition of _economics_, and thus don’t really communicate. Many of
Dasgupta’s points however are accurate. On the other hand, what is of
value in Heilbroner’s view is that Political Economy seems to be
getting less attention than one might hope for. This point is not
really answered by Dasgupta - who seems to neglect the Political
Economy issue of _integration _of scientific knowledge for the
management of the state.
All authors
All authors advise their colleagues, policy advisers and politicians.
All however accept the current institutional setting of economic policy
making, and accept that their thoughts get less unbiased attention than
could be useful.
My advice however is a constitutional amendment for an Economic Supreme
Court. The lack of sufficient checks and balances is a major cause for
the tragic economic record of the last century. When experts know of
Pareto improving possibilities, then policymakers have too much freedom
to neglect this. Policymakers have too much freedom to pursue their own
pet theories even in the face of contradictory evidence.
43. Relating to Sen, Galbraith and Cox & Alm
Sen: “Development as freedom”
When Amartya Sen writes a book, it is likely a useful one. Sen (1999a)
will help economists to refocus on freedom instead of income, as Hayek
once tried but failed to convince. Sen admits that his message is not
new (see p289). But when it has been forgotton, or told unconvincinly,
then it sounds pretty new.
One of the prime reasons why Sen is convincing, is that he makes the
connection with Adam Smith’s ‘sympathy’ argument. Sen is both liberal
_and_ social, and presents freedom as a private _and _social goal.
Hayek often got out of touch with ‘sympathy’, or at least allowed that
reputation to grow.
One of the prime reasons why economists have been seduced to put income
before freedom is pure pragmatism. Income is a quick and dirty variable
- and by itself already hideously complex to properly administrate and
monitor. Income tax laws and the execution of them require huge
bureaucracies. Price index measurements are a monk’s paradise.
Maintenance of fair incomes requires extensive labour relations and
social security laws. And this is just simple income.
If we would look at the freedoms, then we get unobserved variables,
their unobserved shadow prices, and a proliferation of equity
questions. While we seem to have gotten used to a concept like the
‘income distribution’, we draw a blank with a ‘freedom distribution’.
The issue of the (im)possibility of utility comparison comes strongly
to the fore again - and the question again arises whether ‘utility’ is
a proper concept in the first place anyway.
The fact that income is such a pragmatic variable however does not
absolve economists from their task of thinking about the proper meaning
of, and means for, The Good Life. While it certainly may take some
centuries more to solve most of the Grand Problems of the ‘freedom
distribution’, in the short run economists still need to think on the
matter.
One of the most powerful arguments in Sen’s book is that he shows that
some policies are clearly misguided from a freedom point of view: So
that we don’t need Grand Solutions to start correcting some errors
already. Where developing countries experience problems providing for
basic freedoms, there we find that many of these already have been
solved to some extent, namely in the Western nations.
Sen slowly but systematically demolishes the ‘different cultures’
arguments, and shows that these cannot be used to withhold basic
freedoms. The idea, so popular in the West - and a reference is Barro
(1996) - that poor countries first need to develop up to a certain
income level, before they can afford e.g. democracy, is a contradiction
in terms, a serious error of judgement, and a disaster for the billions
of paupers concerned: for they are denied their freedoms and thus will
remain poor and underdeveloped for much longer. The pitfall for
(regression) analysts like Barro (1996) is that they take income as the
prime target, and investigate whether ‘more freedom’ correlates with
‘more income’, presuming that the latter is the most interesting. But
when the true variable is The Good Life - also defined by a low infant
mortality or the absence of famines - and when it can be shown that it
requires a certain level of democracy if such horrors as famines are to
be prevented, then such (regression) analyses are terribly misguided.
Perhaps this summary does injustice to the intentions of these
researchers, but the point is true that there exist such views, and
that Sen is only one of the few academics to seriously oppose them.
Solutions for freedom as they exist in the West can be tried in the
developing countries as well, and, while cultural adjustments indeed
may be required, _adjustment _is something else than _withholding_.
Sen’s analysis will provoke much discussion. Researchers, like Barro,
will be challenged to reconsider the issue. The policy makers at the
World’s capitals will be challenged as well. Certainly the ‘cultures’
argument will be a strong subject for contention. The prime thing to
hope, however, is that the academic tendency to research, research and
research will not be abused by the politicians to bury the Sen argument
- and we can only hope that the scientists are aware of their
responsibility in this.
On the cover of the book, Kofi Annan, the UN Secretary General, already
states gratefully that the UN “has benefited immensely from the wisdom
and good sense of Professor Sen’s views”. This is wonderful
recognition. But we can clearly see that this is only a beginning of a
longer change. As a question, that I perhaps may raise myself, I wonder
whether it would not be time to take the World Bank from its current
track on traditional ‘income economics’, in which it has become so set
in its ways, and change it to monitoring the freedoms. On second
thought, it would be a pity to throw this current expertise away, since
income still is something useful to have - if I may put it that way.
Would it not be much better to create a new ‘Liberty Board’, or
whatever name, for the administration, help, guidance and inspection on
such freedoms ? In fact, as Sen clarifies, the freedoms can arise in
all dimensions of human life, and can have surprising interconnections.
Logically, one would have to monitor freedoms in all such dimensions -
as, in fact, governments in Western nations have all kinds of
Ministries and Agencies. Logically, again, the UN might as well mirror
that kind of organisation. “Rest assured,” I once remarked to Jan
Tinbergen, “that world government will come about surely, one day.” -
and I got a smile as a response. It would be good if this logic could
be echoed in the advice of our fellow economists to the larger public.
I enjoyed a certain perspective on Adam Smith. First the Smith quote:
“Whenever the legislature attemps to regulate the differences between
masters and their workforce, its counsellors are always the masters.
When the regulation, therefor, is in favour of the workmen, it is
always just and equitable; but it is sometimes otherwise when in favour
of the masters.” (Sen:323).
The perspective is that Smith’s aversity against government meddling
derives to some, and perhaps a large, extent from such imbalance of
power. Conservative political views of Smith emphasis the first, no
government meddling, but forget the precondition. In a democracy, Smith
would well have come to a more positive approach to government
influence - no doubt still critical, but less averse to meddling in
principle.
A point of critique. Sen compares the population control in China,
based on restrictive laws, with that in Kerala, India, based on
emancipation of women and on influencing convictions under basic
freedom of decision. He finds both equally effective. The Kerala
approach then clearly is preferable - while, Sen critically notes, the
Chinese one may also result into problems when there is a political
crisis and people no longer believe the authorities. He uses this to
show that freedom is both a target and a means. My problem with this
comparison is that Sen, while surprisingly subtle in many points, may
not be subtle enough. There are many differences between Kerala and
China, and not just the difference between these policies. As once
found for Italian districts: their kind of democratic attitude and
level of economic development were found correlating with their kind of
government in the 15th century city states. Nature’s way are quite
complex and surprising. Yes, this is precisely the ‘cultures’ argument,
the major bone of contention.
My point therefor is that Sen’s argument is convincing at a logical
level - which means that we thus must reorganise Development towards
the Freedom paradigm - but that for each separate issue it is up to the
specialists to determine their findings. I don’t have to decide about
birth control methods, but I can agree that freedom is an important
variable that needs to be taken into account, as means and objective,
and it is useful that there is an agency that helps the Chinese
government to see how they can improve their policies. With lots of
diplomacy, good dinners and the big stick of public opinion.
Sen’s analysis nicely fits my own analysis: that basic economic
necessities have been neglected by our governments, and that economics
itself has played a bad part in this. I have concentrated on Western
unemployment and poverty, referring to lack of freedom from the
perspective of Montesquieu, and referring to Roosevelt’s Four Freedoms.
Sen considers development or the whole economic problem relating to The
Good Life. Strangely he does not refer to Roosevelt. But our arguments
supplement and strengthen each other. Also, one of the implications of
my analysis is that when all governments start having Economic Supreme
Courts, then these will exchange information, and this will create a
network of international co-ordination, which is another part of the
solution to the ‘world government’ problem.
Sen rightly comments that Europe only gives money to the unemployed,
but takes away their freedom and right to a normal life with
professional and social recognition. A point of critique is that he
does not seem to understand the cause for European unemployment. My
hope is that he gets to read my book and will agree with my analysis.
Sen also does not see yet the proper solution to the Arrow paradox. I
have discussed his statements in an appendix to the ‘Arrow chapter’
above. We should note that Sen in some respect suffers from a tragedy.
On the one hand he wants to explain that social decision making is
important (for example to guarantee freedom), on the other hand his
erroneous presentation of the Arrow Theorem has blocked good research
into social choice and has induced many to become very critical of
social decision making.
In a next edition, this should be adapted: “The butcher sells bread to
the consumer (…)” (p256). We find the correct ‘meat’ a few pages later,
so it is not because Sen is vegetarian.
Sen’s discussion of Hayek I discuss again in the Hayek appendix below.
It should be observed that, when Sen’s argument is stripped from all
its footnotes and its rooting into economic theory and history for the
sake of the economic community, then many of the key insights are of
such a character that they not only must be, but also can be,
communicated to that larger public. For example, the relation of the
emancipation of women to lower child mortality does require a
statistics apparatus and an analytically proper explanation before it
can be be established as a scientific finding, but once it has been
established, then it is something that the general public needs to
know, and can easily understand. Communicating these findings is,
again, a task for the specialists.
The Dutch government could help create more public attention for Sen’s
analysis, for example by starting to provide development aid to the
poor in the US American cities who in some dimensions are worse of then
the people in Kerala. It will be interesting to see how the US Congress
reacts to that, and how the media will report on that.
Galbraith: “Created Unequal”
James Galbraith’s “Created Unequal” (1998) is advised reading.
Galbraith provides a quite accurate and chilling history of how
prosperity gave way to stagflation as a result of misguided policy -
and he shows how economists provided the misdirections and the
apologies. Galbraith is clear of thought and masterly in language,
‘another Paul Krugman’. And actually, Galbraith presents us with an
original contribution to political economy, while Krugman is more of a
chroniquer.
A useful qualifier to this: Galbraith also has _many_ thoughts and
ideas, and this makes the book on occasion a tough read. He admits:
“This book began as an inquiry into the origins of the inequality
crisis. It has become in part a tract on the reform of monetary
policy.” (p232). The reader has to be as flexible as the author,
otherwise this book will be lost to you. [126]
A good critique of the book has been written by Thomas Palley (1999).
[127] Palley’s review is some six pages, and since it is a very good
review I concentrate here on the relation of Galbraith’s analysis to my
own.
I am quite amazed by the similarity and closeness of Galbraith’s
analysis and my own. And where we differ, the analyses rather
complement each other. But not fully. Though our two analyses run
parallel for many pages, he comes out with a somewhat different
conclusion.
Galbraith is focussed on the pre-tax earnings distribution and pays
less attention to the after-tax net distribution. In this respect he is
quite American, where meddling with the income distribution via taxes
is somehow quite unpopular.
Galbraith does not use my analysis. Hence he does not use topics like
differential indexation, the tax void, tax induced crowding out on the
labour market, etcetera. Often the educated reader can see such
thoughts glimmering between the lines, but they are not explicit.
Galbraith tends to neglect the impact of taxes on the minimum wage, and
to downplay the latter’s importance for labour’s competitive position.
He actually advocates a rise of the US minimum wage, in terms that
suggest that he is thinking of the gross minimum !
Galbraith’s basic argument is that ‘a decent level of equality’ is both
a goal in itself and an instrument to control the economy. Looking at
causes for the rise in inequality in the US, he finds unemployment the
main cause, and economic policy to be the main cause for that again.
Hence his next focus on US monetary policy. Galbraith presents a
regression analysis to back up this line of reasoning. The relation has
a good causal explanation, and the _R_2 is high, so this is a
recommendable result. In my research I am however less motivated by the
inequality issue. I consider unemployment itself the main problem. It
so happens that the two analyses then merge on the latter. But it also
calls to question whether inequality is a useful lever for the debate.
The topic of inequality may distract people - and actually repel those
who are not interested in that subject per se.
With Krugman, Galbraith rejects the claims for ‘technology’ and
‘globalisation’ as the causes for stagflation. He rightly criticises
the role of economists in economic policy advice, where they have
suggested such causes. Galbraith’s argument against such ‘skill bias’
is remarkedly similar to mine:
“In periods of high employment, the weak gain ground on the strong; in
periods of unemployment, the strong gain ground on the weak. (…) All
are best reconciled to a theory of differential power, rather than to a
theory of differential skill.” (p266)
Strangely, the notion is missing from the book that taxes could and
should be used directly to create a better bargaining position for the
lowly productive.
He also criticises the ‘_liberal_ supply siders’ - i.e. those
intellectuals who defined the agenda of ‘progressive’ politics in
1980-2000. Ira Magaziner pops up again. Galbraith recalls that Krugman
already criticised these demagogues, but adds the criticism: If
education is to be regarded as a tool for competitiveness, then we lose
the idea of eduction for eduction’s own sake. And mutatis mutandis for
public goods. It is about time that this critique is given.
While Krugman argues “we don’t know” - though recently seems to incline
to the ‘technology’ argument - Galbraith provides a clear answer:
Policy abandoned the commitment to full employment under a stable price
level. Of the 1950-1970 prosperity he says, as I have been argueing for
some years too:
“There is no compelling argument that this achievement was anomalous or
irreproducible. I believe, on the contrary, that it resulted from a
sustained period of sensible policy, later abandoned.” (p267)
The major error that economists made was - in Galbraith’s eyes - the
adoption of the NAIRU framework. This requires a longer discussion,
some paragraphs below.
Galbraith’s argument has to do with the ‘political’ aspect of political
economy. Around 1980 Carter and Volcker considered inflation far too
high, and the decision was made to let the Fed go ‘all out’ for
inflation control. [128] Galbraith shows that this was a break with the
past. In the past more tools were used and many government branches
co-operated with the Fed. The 1980 decision changed the economic policy
making structure and culture, and it became socially acceptable to have
high unemployment as a way to tackle inflation.
I think that Galbraith’s argument is correct in this. And he is quite
correct in argueing (e.g. page 233) that this structure should be
changed again to the workings of old, if we want full employment under
a stable price level again.
I am afraid, though, that this part of Galbraith’s argument will hardly
convince the fellow economists. Economists already know about the 1980
switch, and Mankiw (1998) dilligently explains the ‘sacrifice ratio’.
The experience does not cause economists to think that ‘full employment
and stable inflation’ really can be combined. Economists regard the
1950-1970 period as rather a freak accident, dependent upon some ‘after
WW II culture’ (or other ‘amateur sociology’).
Galbraith relies on the ‘equality as goal and tool’ paradigm. Restating
on p240-246 what he sees as the old recipe and the lessons from
fighting inflation:
“Thus, we need to develop an equalization strategy that is
simultaneously a comprehensive anti-inflation program: low interest
rates, high employment, a higher minimum wage supported by a stronger
union movement, a maximum-minimum pay ratio, and a national prospective
inflation adjustment. Neither taxes nor transfers play the critical
role here, as the idea is to bring about an equalization of economic
incomes before taxes and transfers, not afterwards.”
The problem that I have with this statement is that economists will
tend not to be convinced by it. The 1980 problems that led to the
abandonment of the ‘old ways’ were very real - and the ‘old ways’
really did not seem to work at the time.
Also, referring to the 1950-1970 period and suggesting that things
solved themselves, as Galbraith is in danger of suggesting (‘major
inflations are caused by wars’ p233), does not sound convincing either.
There was some real policy making then - that somehow lost its power
around 1980.
Where Galbraith suggests a more modest role for the Central Bank, I
also think that economies cannot afford losing the Central Bank as a
‘fighter of last resort’ - who has to raise the rate of interest if all
other methods fail. So some of Galbraiths specifics would have to go,
though the general line of reasoning is laudable.
Galbraith’s analysis of the regime switch is correct, but he does not
provide the true cause. My point therefor remains: If politicians and
their economists don’t understand my DRGTPE analysis, and the
mechanisms of differential indexation and the tax void and the
consequences thereof, then these policy makers might well be right to
prefer fighting inflation even at the cost of unemployment. [129]
In my view, for sure, the fellow economists who would dismiss
Galbraith’s argument would be too fast too. Galbraith’s argument
actually is balanced and to the point. Yes, a return to the ‘old ways’
of sharing the reponsibility on fighting inflation and unemployment is
useful. But Galbraith is too optimistic about the fire power of his
guns. His scheme requires more for it to work. Indeed, I think that it
are the tools that are provided by my own analysis that would warrant
that such a system can work - as it worked in 1950-1970.
Galbraith usefully criticises monetary policy for its impact on the
distribution of income. The mechanism is peculiar strong in the US
where the rich pay relatively few taxes. If the Fed raises interests
rates - and thus, in the current economic system, unemployment too -
then it also ‘taxes’ the middle class with both an ‘interest tax’ paid
to the rich and a ‘social security insurance tax’ paid to the poor. In
1998, Alan Greenspan, Fed chairman, argued about the distribution of
income: “Yes, I am very concerned, but the Fed can’t do anything about
it.” Galbraith shows this to be wrong, and argues that the pre-1980 Fed
was involved in doing something about it, and that a restructured Fed
can be involved again.
Galbraith’s analysis is fitting for a book on inequality - but I think
that a middle class person would not need the inequality argument to be
opposed to such taxes. Alan Greenspan now is an American Hero - and I
think that he deserves much of that credit - but Galbraith provides a
narrative that would cause many Americans to reconsider their views.
Galbraith correctly calls to memory that the Fed is not really an
impartial government institution, but a body from within the banking
system. There are some private interests here, which would be
sufficient reason for reform anyhow. In an appendix I give the
‘parallel argument’ of the Economic Supreme Court with respect to the
Central Bank. Galbraith’s text set me thinking on this.
Galbraith proposes that the US Fed becomes more accountable to the US
Congress - as it is ‘a creature of Congress’. I tend to opt for
independence like now exists for the European Central Bank. There must
be some co-ordination in economic policy making, and co-ordination
becomes somewhat difficult if too many institutions and interests are
involved.
As a European, it strikes me that Galbraith concentrates so much on
pre-tax equality, while I would be satisfied with after-tax equality. I
don’t believe the stories that many of the fellow economists tell about
‘technology’ and ‘globalisation’, but my approach tends to be to let
them argue and research, and concentrate on the after-tax equality.
This however is not Galbraith. He attacks the conventional wisdom on
the pay structure.
He correctly reminds us that pay is not so much an outcome of marginal
productivity in a free market, but as much a result of social rules -
education, laws, unions, living standards, and such. Where laws and
customs affect the economy, then we know from Coase’s Theorem that
perhaps the final utilisation of resources is not affected, but at
least the distribution of welfare is so. Galbraith here is in line with
Keynes’s attention for relative wages, and my reference to the ‘pecking
order’.
However, when Galbraith argues that ‘more equality also helps to
control inflation’, then his argumentation is less convincing. For
example:
“We will discover that efficiency improves when a larger number of
people feel they have a fair shot at being middle class, and when
‘middle class values’ come again to define our broader culture.”
(p268).
He here refers to Nothern Europe and Japan. I tend to think that there
is value in this argumentation, but I doubt that US free market
economists will agree. They will point out that, alas, Europe has an
official rate of unemployment of 10%, while the unofficial rate is
higher. So, Galbraith here likely is right, but loses the argument
because his munition isn’t strong enough yet.
At one place he shows him aware that Germany has such a high
unemployment rate, but then he suggests that this is caused by an error
in policy making (p235). So in one place ‘more equality’ is advanced as
the solution, and at another place it is not enough. I am a sympathetic
reader, and can see through the argumentation. But the argument now is
vulnerable to readers with less sympathy. Also, Galbraith’s critique on
European policy differs from mine.
The reason why I find value in Galbraith’s argumentation should be
clear. Proper tax measures can keep the lowly productive in the labour
market, and thus increase competition: making it more difficult for the
higher productive to demand pay rises. Thus, there is a valid argument
that should convince the US free market economists - and Galbraith’s
and my arguments nicely complement each other. But I don’t use the
inequality argument: I use market positions.
In fact, Galbraith _does_ use - in one place - the same argument on
market positions ! Namely:
“(…) a change in the relative market power of skilled and less skilled
workers can occur for reasons not connected in any direct way to
political decisions. (…) firms (…) allocate the squeeze in their cash
flow occasioned by the rise in price of an important input, in such a
way that a disproportionate share of the burden falls on less skilled,
less powerful, more readily expendable workers. (…) When changes such
as these are run through an analysis that has been constructed from the
beginning to be blind to the presence of monopoly power, these kinds of
changes would, _and do_, [sic] show up in the data as “skill-biased
technological change.” Skill bias is thus a phrase that can account,
with perfect plausibility but equally perfect meaninglessness, for many
different phenomena (…)” (p46)
So the wonder is why Galbraith does not stick to this - sufficient -
argument, and later drops it and continues on ‘middle class values’.
Note too that elsewhere he explains - quite correctly - that ‘skill’ is
an abused term, since someone can be very skilled (e.g. in making
typewriters or other obsolete objects) and still be displaced. What
counts is the ‘economic empty box’ of ‘productiveness’ - for which an
education is only an indicator.
Similarly, it was a pleasant surprise to me that Galbraith (p48) also
found the ‘sheltered - exposed sector’ argument. He does not refer to
the impact of taxes (of course) but uses an example of a change in the
terms of trade.
Galbraith is of the opinion that you can only see these mechanisms if
you drop the assumptions of a fully competitive labour market, and
allow for monopolistic power. I am not entirely sure of this.
Heterogeneous labour might be congruent to monopolistic competition -
but, anyhow, I’d rather take heterogeneity as the starting point, and
then proceed with the model, and stay away from the - perhaps
ideological - debate on market type. This actually might provide a test
for our two theories: it the tax approach would not work, then
monopolistic competition might be a force too strong - and the next
candidate for the ‘main cause’.
I was very much surprised about Galbraith’s rejection of the NAIRU
concept. On second thought, I think that he has some argument. But it
is convoluted, and needs to be straightened out.
Note first of all that I have been using the NAIRU myself consistently,
and have been arguing since at least 1989 that it shifts. The use of
the concept is quite natural for an econometric model that is used for
prediction and policy analysis. I also have been quite critical about
tax policy, and have been arguing that the NAIRU may be as low as 2% if
policies are correct.
Galbraith does not have that background. Instead, he has a field day in
making fun of our fellow economists who - indeed - make fool of
themselves. Galbraith nicely remarks: “The NAIRU, like the wage rate,
is downward sticky.” (p180) Perhaps in reality, but certainly in the
estimates that the colleagues have been providing in these last years.
Economists lag behind the observations. Robert J. Gordon, who I greatly
respect, appears to provide a NAIRU estimate with a confidence interval
that seems to make it rather useless for policy. Galbraith rightly
comments that the NAIRU in this manner becomes a ritual blessing for
the powerful and the status quo - and is far away from real science.
Galbraith gets upset, and quite justified so, since so many innocent
people are victims of this intellectual incapacity.
Nevertheless, Galbraith himself mentions an unemployment target of “4
percent or lower” (p171). This causes the question with me whether this
is not a NAIRU again, and why it cannot be 2%. In his suggestions for
anti-inflation measures, Galbraith also advocates wage restraint, and I
cannot but think that the threat of unemployment has a role here.
Galbraith recalls the Friedman quote where the ‘natural rate’ of
unemployment is ‘ground out’ from the ‘Walrasian system’. Galbraith
makes fun of this, essentially arguing that ‘Walras’ was before
‘Keynes’:
“From a proper Keynesian perspective, the correct response to
Friedman’s second formulation of the natural rate hypothesis would have
simply been, “Sorry, but at the aggregative level the ‘labour market’
is a misconception; it does not exit.”” (p177)
Part of this is going too fast. First of all, we should ditch the word
‘natural’. Secondly, if we drop ‘Walras’ from the Friedman quote and
substitute ‘the proper model’, then we have a proper argumentation.
(And we should remember that Walras was a very subtle economist, with
more attention for dynamics than perhaps commonly thought.) Thirdly, I
don’t see why we cannot model the labour market as a ‘market’ with
aggregate impact and spillover - even though I value the ILO dictum
“Labour is not a commodity”. The ‘market’ model is useful economics,
and the models can be used for policy advice.
So I think that Galbraith might well adopt the NAIRU and use it to his
advantage. It is a useful modeling tool. If you put the hammer in the
toolbox, instead of on the shaky shelf above your head, it won’t hit
you on the head so often. Note also that Graafland (1990a) and Gelauff
(1992) following Hersoug (1984) have provided more theoretical
foundations to the concept, so that the complaint ‘an empirical
regularity in search of a theory’ no longer seems valid.
Whereas I use a whole earnings distribution, Galbraith uses a Theil
measure (and calls this a measure for inequality) - and, again quite
parallel, we both link these to fiscal and monetary policy.
It may well be that an inequality measure is more efficient to use than
a whole distribution. Such measures have been around for a long time,
but it seems to me that Galbraith’s book is the first time that it is
both developed in the present detail and linked up with policy.
Interestingly, Galbraith uses his measure to find that US unemployment
should be below 5.5 % in order to keep equality constant or improving.
Referring to the ‘natural rate’, he calls this the ‘ethical rate’. I
wish he hadn’t done that, and had dumped the word ‘natural’ too. But as
such his analysis nicely sharpens our insights in the dilemma’s of
policy making.
Galbraith provides some technical evidence on the developments in the
various industries. This research is interesting in itself too, but
while the book progresses, it appears, a bit to the dismay of the
reader, that the industrial analysis is primarily given to show that it
is less relevant.
Galbraith has found a ‘productivity measure’ (‘P-measure’) - defined as
value added per production worker hour - that enables him to find three
clusters in the US economy: a ‘knowledge’ K-cluster, a ‘consumption’
C-cluster and a ‘service’ S-cluster. The graphs show that these
clusters can be found in the data indeed. The P-measure might be less
convincing, and might appear ad hoc. However, when it turns out that
these clusters can (‘basically’) be represented too by the share of the
wage bill of non-production workers - more and higher paid R&D and
marketing workers - then the clustering starts making more sense, and
good sense actually.
The link between this part of the book and the rest is rather weak. The
idea seems to be that this research underlines the monopolistic
tendencies in the US economy. For such a conclusion, however, more work
needs to be done. Another line of thought is that this novel
understanding of the US industrial development would help us to better
understand the role of technology - and its impact on wages and
inequality. That may be true too - but I was already convinced of the
less relevant role of technology anyhow.
In my view this part of the analysis will surely help to better model
the economy, but it is less relevant for the analysis of inequality
proper.