Tuesday, November 14, 2017

Bill Mitchell — Automation and full employment – back to the 1960s

On August 19, 1964, the then US President Lyndon B. Johnson established the – National Commission on Technology, Automation, and Economic Progress. He established the Commission in response to growing concern during the deep 1960-61 recession that the unemployment had been created by the pace of technological change. Ring a bell! He wanted to an inquiry to explore this issue and come up with recommendations on how to deal with the possibility that automation was wiping out jobs and the future would be bleak. Before the Commission had reported, the Federal government had reversed its fiscal austerity and the resulting stimulus had driven the unemployment back down to relatively low levels. The Commission noted that unemployment was largely the result of inadequate total spending and that the Government had the tools at its disposal to eliminate it. They considered that there would be workers (low-skill etc) who would suffer more displacement from technology than those with more skill etc, but that ultimately even those workers would be able to get jobs if the public deficit was large enough. In this regard, they eschewed pointless training programs that did not provide immediate access to jobs. Instead, they recommended (among other things) the introduction of a Job Guarantee (Public Service Employment) financed by the Federal government but administered at all levels of government. It would pay the Federal minimum wage and be available on demand. This is the preferred Modern Monetary Theory (MMT) approach and rejects solutions that rely on the provision of a basic income guarantee to resolve the problems created by unemployment.
Technological innovation has often been disruptive historically, but the disruption has always proved temporary, and progress ensued. The problem is not technological innovation. Evolution always brings new challenges along with new opportunities. The primary challenge is to adapt to change. Standing in the way of change is seldom successful.
The currency-issuing government has the responsibility of maintaining aggregate spending at a level sufficient to generate sufficient jobs overall.
This level changes as the pace of labour force growth and productivity changes. But the fact remains – the government can always purchase anything that is for sale in the currency it issues, including all idle labour.
There is never a reason for persistent mass unemployment. Mass unemployment is a political choice not a financial necessity.
This doesn't imply that technological innovation is not disruptive. It may be disruptive to those that lose their jobs, or are otherwise affected, such as new industries being born (tires) and old ones shuttered (blacksmiths, horseshoes, and horseshoe nails). There was huge disruption in customary employment as a result of the transition from the agricultural age that centered on farming to the industrial age that centered on manufacturing. We can anticipate something similar in the transition from the industrial (analog) age to the information (digital) age. For example, if leisure increases as a result of disruptive technology, so will work in areas that serve it. People won't just sit around — as long as they can afford to do something of interest.

A currency issuing government has the ability to address change in a timely way so as to minimize the effects of disruptive innovation by maintaining full employment and keeping the economy on track. It's a matter of maintaining demand so resources that technological innovation and increased productivity make available are not idled owing to lack of demand.

A currency issuer is capable of addressing this by maintaining the flow of money at the level of effective demand commensurate with supply at full employment to the degree that the private sector does not. In this sense, government uses its "power of the purse" to act as a buffer against unemployment.

Technological innovation increases the potential for prosperity and also leisure. Managing the transition involves political decisions along with a correct understanding of economics and government finance. Then it is a distribution issue

Distribution is a political issue with respect to who wins and who loses, rather than just an economic one. Currently, this is where the problem can be traced. Its' a matter of ignorance about economics and government finance, but also involves ideology heavily.

Bill Mitchell – billy blog
Automation and full employment – back to the 1960s
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia


AXEC / E.K-H said...

Full employment through the price mechanism
Comment on Bill Mitchell on ‘Automation and full employment ― back to the 1960s’

Bill Mitchell argues “A currency issuing government has the ability to address change in a timely way so as to minimize the effects of disruptive innovation by maintaining full employment and keeping the economy on track. It’s a matter of maintaining demand so resources that technological innovation and increased productivity make available are not idled owing to lack of demand.”

This is not false but only the first half of the correct employment theory. Bill Mitchell argues within the familiar Keynesian macro framework. He has not realized that Keynes’ employment theory provably false.#1

The elementary version of the correct (objective, systemic, behavior-free, macrofounded#2) Employment Law is shown on Wikimedia.#3

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates a budget deficit = credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches.

With regard to automation then follows (under the initial condition of I given and rhoE=1 and P constant) that the average wage rate has to rise in lockstep with productivity in order to keep rhoF constant and employment at the given level.

There are TWO set screws for controlling employment, i.e. rhoE and rhoF. Bill Mitchell completely ignores the macroeconomic price mechanism which is formally embodied in rhoF.

False theory leads to false policy guidance. With their defective employment theory, economists ― including Post Keynesians and MMTer ― bear the intellectual responsibility for the social devastation of mass unemployment.#4

Egmont Kakarot-Handtke

#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

#2 The macrofoundations approach starts with three systemic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start it holds X=O.

#3 Wikimedia, Employment Law

#4 For details of the big picture see cross-references Employment

Kaivey said...

But your system will lead to poverty for a large section of society and this is a capitalist system that is under performing. It may work as a natural system like as in nature, but condemns millions to people to a life of misery, and millions of others to a suboptimum one. It means that people will always be maxed out on work because other people will be forced to work harder and harder due to competition. This is what everyone who advocates a pure free market system ignores.

The system you advocate may be a perfect machine but nature is not a machine, I.e, people in the past who were forced into poverty by a pure economic machine rebelled starting revolutions. Where does that fit into your equations, that those at the bottom will rebel? You advocate that your system takes into account psychology but I don't see where it does.

You say that Austrians got it wrong too but I'm assuming you are advocating a pure free market system. But a pure free market system may be a perfect machine but it also drives wages to the lowest possible level which keeps inflation low but also keeps purchasing power low too and so the perfect economic machine becomes perfectly underperforming as the maths will show. But the people at the bottom are not machines within the economic machine but have feelings, hopes, desires and will push back against the pure free market machine and attempt to create unions, but the ruling elite will try to alter the law to smash the unions but where does all this fit into your mathematical equations? As you can see, human society is far too complex to fit into the simple (although highly mathematical) equations of economists.

MMT is a way of tweaking the machine to run at a more optimum level taken into account people's needs, psychology, desires, and wants, and the greater good of the collective society. It may lead to smaller 0.001% but a happier more egalitarian society. It's a superb machine designed by human ingenuity and hyper intelligence to outsmart nature and the pure - law of the jungle - mathematical economics of the unfettered free market

AXEC / E.K-H said...


Stop hallucinating and learn to read!

The title of my post is ‘Full employment through the price mechanism’. It is shown that ― for systemic reasons ― the average wage rate must rise faster than the productivity in order to move towards full employment and that the average wage rate must rise with the same rate as productivity in order to maintain full employment and price stability.

I made it quite explicit that “This is the OPPOSITE of what microfounded economics teaches.” Your Pavlovian waffle about the advocates of the free market system is entirely beside the point.#1

You say “MMT is a way of tweaking the machine to run at a more optimum level taken into account people’s needs, psychology, desires, and wants, and the greater good of the collective society.”

Dream on. MMT is proto-scientific garbage. The employment theory is provably false since Keynes.#2 The political claim that MMT fights for the little man (Kelton: a pony for every American) is rancid soap opera stuff.#3

For the ‘greater good of the collective society’ MMTer have to be expelled from the scientific community.

Egmont Kakarot-Handtke

#1 The market economy is inherently unstable and economists never grasped it

#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

#3 MMT: Money-making for the one-percenters

ANC Driver said...

What Egmont teaches is the only teachings I have been able to find which reflects how the law defines economics and financial wealth, and because the law must understand economics and wealth in order to enforce all legal relations a result, it is the only teaching which reflects reality.

MMT and many other economists treat financial wealth and how it is created as having no 'counter-equity', which is an impossibility in law, for no 'right' can exist without a corresponding duty. Profits can only exist nominally for the simple fact that real resources do not exist by virtue of a corresponding duty.

Although Egmont calls it distributed profits, I prefer to call it 'passive income', although the meaning is the same - the right to an income which is derived without exchanging labour.

When governments spend wealth into the economy the only hands it ends up in are those who own the rights to passive income (i.e. those who own the means of production) - it can go no other place other than in eventual taxation. The more who seek passive income, the higher the ratio it is to active income, the more the means of production becomes privately owned (and this includes owning the fruits of labours through bank interest), the higher must go the required productivity of remaining active workers, until a breaking point is reached. Currently, in Australia for instance, the required productivity of all workers is above 2, meaning they produce more than double what they can purchase the with the wages they receive. The higher this ratio goes the more fed up workers become and the more envious they become of the passive income earners, the more jump on the financial asset bandwagon. I asked Bill Mitchell why no one seems to factor in the passive income element into their equations and models, especially considering that many workers look to increase their ratio of passive to active income in an attempt to retire as early as possible, and so any job guarantee program will only encourage it, and instead of answering he blocked my comment. Why I do not know, it's a legitimate question.

AXEC / E.K-H said...

ANC Driver

There are two issues here: employment and profit.

Profit, in turn, comes in two forms: monetary profit Qm and distributed profit Yd. This gives one the Profit Law for the elementary production-consumption economy as Qm=Yd−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving. Note that there is a positive feedback loop between profit and distributed profit. This, by the way, sinks the idea of economic equilibrium.

For the investment economy including government and excluding foreign trade, macroeconomic profit is given by Qm=Yd+(I−Sm)+(G−T). This compares to the original MMT balances equation (S−I)+(T−G)=0.#1 The equations clearly tell everybody that MMT deals with a ZERO PROFIT economy. Nobody has ever seen a zero profit economy. So the whole of Modern Monetary Theory is vacuous blather.

This means, of course, that MMT employment theory, too, is vacuous blather. The Employment Law for the closed economy is shown on Wikimedia.#2, #3

The Employment Law tells everyone that the average wage rate must rise faster than productivity in order to achieve full employment. This is a testable proposition because the Employment Law consists of measurable variables.

It is only a question of time until MMT is empirically refuted.

Egmont Kakarot-Handtke

#1 See Wikipedia, Modern Monetary Theory

#2 Wikimedia, Employment Law

#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster