Wednesday, May 22, 2013

Sticky Markets and the "First Mover" Problem

Aahhh, complexity is a many splendored thing, especially when it involves sticky wages which do not readily change just because people say they should! It's tempting to look at wages as the obvious place of correction whenever unemployment rises and economic conditions go south, but then whose wages exactly are we talking about: mine, yours, or that guy over there by the window? And how do we suppose would be the best way to bring that about? Hey, you "go first" (knock down those wages) and someone else will surely go next...well, perhaps not so much. Looks like we could be seeking equilibrium for a long time, especially as this issue has been (once again) moved to the back burner with the better employment numbers of late. Plus, what may appear as a success story in this regard often turns out to be "shared" jobs which are now part time.

As mentioned in my last post, monetary policy has done a reasonably good job of addressing short term and cyclical problems. Over time, at least in the U.S., government is likely to continue decreasing overall its contribution to services as entitlements become more substantial, in the midst of continuing unemployment which has now become more structural than cyclical. While macroeconomic thought readily distinguishes between structural and cyclical issues, it nonetheless is better equipped to address the cyclical aspects. Consequently, structural unemployment realities tend to get "smoothed out" over time without any clear strategies. War is a lousy "strategy" that too often gets utilized as a result. When people ask, "Why do we tolerate war?" they really ought to be asking, "Why do we insist on looking the other way, when people don't have economic access?" Unfortunately, we still have the mid to long term scenario where money does not yet address many of the services which people will increasingly take upon themselves in the meantime.

One of the primary goals of this blog is to return monetary relevance, or equivalence, to many ongoing responsibilities which people know to be important, but don't yet know how to address in realistic terms. We just don't have good ways yet to address this important issue, in the present. Consequently a nation may decide to print money to encourage domestic spending when global cross border capital flows do slow down (60 percent from their 2008 peak) and yet it seems no one really has a clue what to do with that money at local levels, which isn't already being done.  Even though recent globalization flows have reversed, nations fail to see recent printing as efforts for the local stimulation that leaders are actually trying to provide, and no one is in charge who can realistically tend to such structural efforts in any organized way, even though structural issues are now clearly the problem.

First mover problems clearly show that such internal coordination will be  necessary for efforts at local levels to work, or local economies will only continue to drive potential workers away, instead of finding ways to create further wealth with what has now become excess markets of human skill. And yet, any institution that would reduce wages would find themselves in a first mover disadvantage, which is but one reason why this problem is so hard to address head on. Plus, reducing wages is simply another way of reconfiguring the pie instead of actually making the pie itself larger. There are many people with skills more than adequate for jobs who don't get hired in the first place, and were wages to decrease to reflect the actual existing pool, there would scarcely be enough left for one's financial responsibilities. That is also one of the problems with the idea of skills auctioning, which is why it not only would need subsidized backing by government in order to be realistic, but is really a back door retreat to subsidized welfare which doesn't address the issue of actual economic integration, in the first place.

A structural nature of economic realities is well reflected in both Austrian literature and ongoing dialogue. However, the still ongoing discussions of production, manufacturing and the efforts of privatization don't really address what people are facing in their circumstances at countless local levels, and right now that matters immensely. Therefore, in the dominant strands of both Keynesian and Austrian thought, I continue to search in vain for the missing human skill factor. Like the Austrians, Keynesian thought sometimes appears backward looking in that it too sees services primarily as both external and government driven, rather than capable of providing wealth creation in a self supporting sense. Cleary I agree with any Keynesian that services are paramount. My concern is that they take the existence of services for granted in ways that appear dangerous for the long run, especially whenever nations run into severe supply side issues, and it is all a government can do to "hold its head above water".

Austrians have much literature that is valuable concerning production processes for actual product that is separate from us and our own time factor. But where are the missing coordination and pricing mechanisms that could assist with the human skill factor so important in the present? This is what people need, to be able to utilize skills amongst one another when in fact their institutions no longer have room for them. Some in the Austrian economic community gave special consideration to Elinor Ostrom who was truly an inspiring individual. Ostrom did excellent work in her lifetime, part of which involved the study of spontaneous organization in communities for shared resources. But, again like so much of economic study, her work in these coordination mechanisms was also intended for actual physical resources which faced certain issues in traditional markets.

The only spontaneous coordination mechanism I have seen to date for skills - outside their primary uses in institutions and familial settings - is a very limited one in the form of time banks, where people are primarily trying to capture valuable skills which, alas, are already restricted in the marketplace to some extent and therefore already needed by others. In other words, the actual arbitrage potential one might expect to find in these time banks is blunted by those who primarily seek the specialized services of those who are already quite connected and busy.

All of this needs to be considered when the idea becomes, "well, if only wages weren't sticky". Are we talking about wages in the now somewhat limited world of manufacturing and production that is still at the center of so much economic dialogue? Or, are we talking about wages in services organizations, which remain set up for institutional and organizational needs, rather than actual market, individual or community needs? Small wonder no true pricing mechanism exists in so many of these organizations that actually corresponds with the realities of economic actors.

Where, then, are Market Monetarists in all of this? Hmmm, one step at a time (maybe you think it's fun to be a radical but to me it's extremely lonely and not fun at all, just, unfortunately, necessary)...I see the pioneers in this movement as looking toward the future in ways that other economists aren't quite as willing to do, and looking towards the future means moving away from the recent past of interest rate targeting which was structured for a much more product oriented and credit oriented economy than will be possible again for some time. I have tremendous hope for the Market Monetarist model because it acknowledges that in a diverse economy, real measurement begins and ends with the economic actor, which is also what skills wealth is about. 

Extensive credit use basically throws the idea of the individual (as integral to the economy) out the window. But people don't seek the same kind of product they sought even a decade ago. Today people look for product in ways that are more about people to begin with: more digital, experience oriented, knowledge and services based, and they do not have strong reasons to be tied to locations which do not promote economic opportunity. Even as I am also Market Monetarist and so promote their cause, I cannot ascribe some of my own positions in this blog to others, many of whom see Market Monetarism through a somewhat more expedient and perhaps practical framework than I do. Still, as a group, Market Monetarists are quite forward looking, especially in that they would provide a monetary rule that would also allow more productive forms of service coordination. In other words, I see Market Monetarists as being in the best position to be a first mover for positive structural change, even if the model is intended for aggregate demand. Therefore, I see Market Monetarists as capable of being first movers in ways which neither Austrians or Keynesians can adequately address, without altering their basic belief systems.

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