Wrap Up for October '15

Currently, non tradable sectors tend to organize as though a single, government defined equilibrium actually exists for everyone. Perhaps this suggests why society seems more divisive and tribal, these days?  http://econ2.econ.iastate.edu/tesfatsi/WhomOrWhatDoesRepIndRepresent.AKirman1992.pdf

Fortunately, since tradable sectors (mostly, not always) need to compete at international levels, much of their product does not cater to any single idea of equilibrium. Non tradable sectors need to take a page from tradable sectors. Until they do, family formation and its associated housing are likely to remain weak. Even prosperous areas which are normally thought of as "open to all comers", may seek to restrict apartment building due to overcrowded schools which are already in high demand.

Also, from the initial link: "...subsidies to production are miscalculated if the representative agent approach is used...Thus to infer society's preferences from those of the representative individual, and to use these to make policy choices, is illegitimate."

Even though the concept of GDP as a war invention is a bit disheartening, the measure nonetheless contributed to "government building" on these terms. We've come a long way from GDP for war, to GDP for happiness. Just the same, readers know I will ask: wouldn't accurate monetary and economic representation for all, be a lot more fruitful? http://www.theglobalist.com/warfare-and-the-invention-of-gdp/

In 2011, Venkatesh Rao wrote A Brief History of the Corporation: 1600 to 2100

Emily Washington at Market Urbanism notes the systemic bias against small scale development. My hope is that local corporations can eventually provide means for the small scale development, which prosperous regions do not feel they need.

Dani Rodrik notes some of the problems that nations have experienced with structural reform.

Scott Sumner touches on some of the fallacies which confuse people re monetary policy, in this Econlog post: http://econlog.econlib.org/archives/2015/10/missing_the_big.html

Max Eden of AEI considers education's current supply side problems: http://www.aei.org/publication/school-choices-supply-problem/

Matthew Yglesias takes Ben Bernanke to task for a most obvious exclusion in Ben Bernanke's new book - the potential of NGDP targeting. http://www.vox.com/2015/10/8/9472807/ben-bernanke-ngdp-targeting

Simply stated, from Ramesh Ponnuru: http://www.bloombergview.com/articles/2015-10-07/why-the-fed-s-rate-debate-is-so-odd

"...two-thirds of the decline in unemployment since 2009 is due, not to the unemployed finding jobs, but to their giving up. Bernanke presumably doesn't want us to thank the Fed for that." (George Selgin) http://thehill.com/blogs/congress-blog/economy-budget/256432-ben-bernanke-and-the-art-of-central-banking

Ryan Avent (also) tells it like it is. http://www.economist.com/blogs/freeexchange/2015/10/ben-bernankes-big-blunder

Sometimes, economists offer practical advice!
https://theweek.com/articles/580341/what-happens-when-americas-sovietstyle-food-banks-embrace-freemarket-economics

Scott Sumner takes a look at the Fed's performance - first 100 years: http://econlog.econlib.org/archives/2015/10/its_hard_to_tea.html

Something about tight money in particular, generally means more schooling is "needed"...
http://blogs.wsj.com/economics/2015/10/14/whether-a-job-requires-a-degree-may-shift-with-the-economy/?mod=WSJBlog

More than money is involved: https://www.farnamstreetblog.com/2015/10/reasons-we-work/

And...more than NGDP is involved. An informative post from Scott Sumner: http://econlog.econlib.org/archives/2015/10/market_monetari_3.html

http://www.theatlantic.com/technology/archive/2015/10/raiders-of-the-lost-web/409210/
"Scholars believe that around 300 B.C. the Library of Alexandria may have housed three-quarters of humanity's texts. Today three quarters of humanity's books are abandoned, out of print and housed only in libraries, if at all. The existence of a resource, unfortunately, has little to do with access to it."

As the labor force participation rate continues to decline...http://www.advisorperspectives.com/dshort/updates/Stuctural-Changes-in-Employment.php

Edward Glaeser took part in this paper on urban networks: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/841.pdf

One reason may be the fact that the gig economy is mostly limited to the margins of productive cities and regions. http://blogs.wsj.com/economics/2015/10/22/an-enduring-mystery-of-the-gig-economy-why-are-so-few-people-self-employed/?mod=WSJBlog

Marcus Nunes suggests a better form of "experimentation". https://thefaintofheart.wordpress.com/2015/10/25/looking-for-wally-when-there-are-many-wallies/

There's good reason: http://www.nytimes.com/2015/10/20/business/many-low-income-workers-say-no-to-health-insurance.html

A Matt Ridley article in the WSJ for his new book: http://www.wsj.com/articles/the-myth-of-basic-science-1445613954

John Cochrane spent plenty of time putting this post together, re economic growth:

A well considered response from James Alexander to the twitterati... https://thefaintofheart.wordpress.com/2015/10/29/what-to-target-its-only-rational-to-use-expectations-of-nominal-output-growth/

Lars Christensen highlights a recent paper from Ryan Murphy in this post: http://marketmonetarist.com/2015/10/29/a-sharp-drop-in-nominal-gdp-will-cause-a-drop-in-economic-freedom/

The New York Times provides some helpful graphics in this article:
http://www.nytimes.com/interactive/2015/10/31/upshot/who-still-doesnt-have-health-insurance-obamacare.html

There were plenty of interesting links this month! A few of these I still need to finish reading. Hope everyone has a great Halloween.

Work Can Be Positive Economic Validation

Many a well meaning person has reasoned that no one should have to "work for a living" - even Buckminster Fuller (apparently), who I have long admired for his contributions and ideas. However - in Fuller's defense - I really don't think he shared Bertrand Russell's viewpoints about work in this Open Culture article.

Like so many in the present, Buckminster Fuller envisioned technology as creating circumstance where people would eventually not need to work. Even so, he apparently believed that technological gains would lead to spontaneous forms of productive activity, which did not necessarily need to be measured or validated in a formal sense.

As it turns out (with too many decades of unfortunate examples already), people are not good at replicating productive activity, if and when monetary and economic validation are not well embedded in primary social patterns. Just the same, it isn't easy for those of limited means (myself included) to explain why the marginalized need dynamic relationships and interaction with resource capacity, through the course of their lifetimes.

When people lose connections, the results of the loss are difficult for all concerned. One of the greatest challenges of the present, is a need for broader workplace classifications: not just for what people need to accomplish, but also what they would like to accomplish.

Consider what economic intent actually consists of. Despite the sometimes negative connotations associated with economic activity, validation of economic activity is central to the wealth creation which societies rely on. Instead of reacting to "negative" forms of wealth creation, why not frame the dialogue to include the positives which participants imagine? Economic activity - first and foremost, is about validation. And the potential for validation is not something that exists separately from us. It is what we are, and what we could be as well.

Time based relationships are important, and they can be ultimately be validated if we want more freedom in our economic realities. A marketplace for time value, would mean greater freedom in how people choose to manage services generation within local groups. Much of what people desire in the workplace can be made real, by way of replication, coordination and the monetary/time/resource backed compensation which leads to cumulative gains over time.

Economic validation matters, particularly when technology could gradually (otherwise) close the loop for social and workplace interaction at local levels. A time based marketplace would restore labor force participation, and insure that populations are always able to purchase what the benefits of technology have made possible. Presently, too many forms of assistance have been generated on non economic terms. By finding ways to formalize, strengthen and monetize these connections, the human desire to assist and help others, would eventually provide a vital role in economic activity,

Rethinking Organizational Patterns

How have organizational patterns become problematic, for present day institutions? Washington is a good example of the fact that all is not quite well, structurally speaking. If government activity were better aligned with a well functioning marketplace, today's political discussions certainly wouldn't be so polarized. Even though the twentieth century contained some notable exceptions (such as the interstate system), marketplace capacity no longer responds well, to "one size fits all" reforms or infrastructure.

Indeed, cynical commenters at some blogs are convinced the only "progress" in Washington is when no one gets their way! In a post at Econlog, Bryan Caplan reasoned that citizens are irrational to make excessive demands of government, because - collectively - doing so only tramples individual rights. However, this does not change the fact that some populations need to move forward on terms quite different from what others seek. How can governments respond?

Plus, resource capacity has changed to a far greater extent, than today's economic frameworks are able to take into account. Individual rights were simpler a century ago, when economic activity was more closely aligned with actual production. If citizens seek greater control now, it is because too many aspects of economic life have (temporarily) been lost to centralized processes.

Even so, this problem is not just about Washington, by any means. After all, states have followed similar patterns in centralization since mid twentieth century. Paradoxically, even though structural change is needed at local levels, the process still needs to be discussed, understood and validated at the level of national dialogue. In any event some reconfiguration is inevitable, as Tyler Cowen noted about government involvement in the evolving circumstance of driverless cars. Some of the points he raised made me think: wouldn't it be simpler, to just revert back to local transportation strategies? In the post, Cowen also mused, "Imagine if we had to write a new constitution today."

Writing constitutions is no walk in the park! Would knowledge use systems need some form of "mini" economic constitutions at local levels? Perhaps the careful consideration involved, would at least benefit coordination processes. After several interesting books re America's beginnings, I've just started reading "Original Meanings: Politics and Ideas in the Making of the Constitution." Even the first chapter highlights the difficulties the founders encountered, as they struggled to build consensus among competing visions for the future.

And such visions, are also competing versions as to control. It is remarkable that our government has held together as well as it has. Who really wants more broad based rules for entire populations, beyond what has already occurred? Fortunately it would be possible instead to experiment with new economic guidelines for small groups, and provide infrastructure which is more responsive to different income and lifestyle patterns.

Hence I was glad to stumble across some Market Urbanism posts which consider local possibilities for reorganization efforts. Both of these posts have additional links which I intend to follow up on. Among other ideas, they discuss ways in which city shares might be held among the public, which ties in with still evolving thoughts regarding local corporations on my part.

In particular, it would be useful to get beyond public and private dichotomies, as the second Market Urbanism link stressed. Regular readers know that I tend to separate organizational patterns along the lines of tradable sectors versus non tradable sectors, because of the different dynamics involved. Tradable sectors are helpful for thinking about the forms of centralization which still work. On the other hand, decentralization for non tradable sectors, would provide means to think beyond old definitions, for public and private enterprise.

Scale: Some Rival and Non Rival Considerations

Long term growth and progress - particularly what has overcome Malthusian limits - results from gains in scale, as Paul Romer noted in a recent post. However, many gains in scale are the result of tradable goods. Whereas non tradable sectors still compensate knowledge use and asset formation in ways which mostly take little advantage of gains from scale. While "exclusive" strategies for wealth creation in non tradable sectors (and luxury tradable sectors) work well up to a point, problems arise when artificially derived scarcity crowds out the gains of scale from tradable goods sectors.

Carried too far, wealth generation - without sufficient allowance for scale - can limit human progress. Even though monetary policy may closely adhere to aggregate spending capacity (as is presently the case), a lack of options for scale access can limit long term growth potential. While it is not possible to open up non tradable sectors to scale across the board, it is possible to retrieve growth at the margins, through symmetric knowledge use and the application of technology potential for building components.

Consider how scale has been limited in terms of human capital, for instance. Paul Romer envisions human capital as purely rival, but notes that it can be useful to treat human capital as temporarily non rival, if doing so allows (tradable goods) product scaled to generate new wealth. For long term growth - however - it is not enough to limit non rival human capital utilization, to gains in scale for tradable goods.

For one, the Malthusian dilemma has been overcome (thus far) through scale applications wherever they are possible. One reason that wealth disparities result in developed nations, is the reluctance of non tradable sectors to allow scale innovation to continue (for low income levels), when it is possible instead to capture wealth from previous or already existing applications of scale. In other words, developed nations inadvertently introduce unnecessary fragility into their systems by capitalizing on non scale wealth.

Scale - as applicable to tradable goods and commodity wealth - is not utilized as the dominant form of wealth on the part of governments. Instead, government wealth is connected to non tradable sectors which benefit from signalling (exclusive labeling) for both naturally and artifically restricted product. And then they attempt to "force" income in general to purchase these exclusive settings! Carried too far in relation to the wealth which results from scale, specialty non tradable wealth can override gains in scale, and lead to negative growth.

Human capital needs broader application on symmetric or non rival terms, which would mean gains in scale for time use aggregates as a whole. Even though compensated time value would scale up purely in relation to itself, human capacity should be central to our economic realities. Doing so would help to overcome the problems of imbalance which are developing between non scale and scale approach to wealth building. Even though Romer's above linked post referenced speeded up growth, economic growth slows quickly when nations purposely choose rival knowledge and artificial scarcity, to generate wealth on closely held terms.

Update: I may have spoken prematurely about a reasonable following of aggregate spending capacity, on the Fed's part. Even as market monetarists have grown more confident, Lars Christensen just observed that an earlier 4% level is gradually drifting downward: http://marketmonetarist.com/2015/10/27/did-bill-gross-get-some-insight-from-this-blog-maybe-but-it-might-unfortunately-be-outdated/

Demand Also Depends on Resource and Time Constructs

Even though money represents the resource capacity of all exchange, economies are also affected by the terms in which production and consumption are defined. How much of any given population is able to fully participate in these settings? Those participation levels matter, for the degree of services and asset formation that is possible.

These issues affect the inaccuracies of demand and supply, as framed in Keynesian terms. However, supply side interests - particularly those representative of non tradable sectors - continue to stand in the way of conditions for optimal demand. The fact that entrenched interests also limit marketplace potential, makes it too easy for the Keynesian model to maintain its intellectual prominence. Demand and supply factors are still engaged in a process of undermining one another, in spite of present attempts to keep economies out of recession.

Hence my initial response to a recent post from Roger Farmer (entitled "Demand creates its own supply"), was "Oh my". I will try to wrap my head around his explanations and also take note when he provides further explanations regarding supply in an upcoming post. But in the meantime I at least need to respond to this:

The Keynesian theory of aggregate supply asserts that firms will increase or decrease the number of workers they employ in order to produce as many goods as are demanded. The French economist John Baptiste Say, famously asserted that supply creates its own demand. Keynes turned the proposition on its head. Demand creates its own supply.  

Keynes argued that the economy is typically producing at less than full employment. And as long as there is any voluntary unemployment everything that is demanded will be supplied.

For one, there is a lack of recognition that different dynamics exist for greater supply in tradable goods, than for non tradable goods whenever the (basic) product in question is time based, such as healthcare. In the present, it has become possible to generate more product (i.e. supply and demand) in tradable goods without increasing employment in these areas. Whereas more demand for time based services should mean more employment, but because of redistribution issues and limitations in knowledge use, this does not necessarily occur.

When non tradable product is time based, knowledge based services production faces several limitations for the fulfillment of supply and demand, which run counter to the production capacity of tradable goods. Product which includes time based application of knowledge sets, tends to only be available in certain time frames. Therefore only a percentage of any given population has the potential to be consumers of time based services at any given moment. This constraint is also affected by the limited quantity of service providers in certain knowledge sets which are actually sought by populations as a whole.

Further, the fact that knowledge based services still rely on asymmetric compensation from other wealth, means demand for services production will remain artificially constrained so long as services are not generated through direct, symmetrical means. Consider how these limits in employment aggregates affect asset formation, for instance. In part because of limits in knowledge based services production, nations are now experiencing limits in traditional production as well.

Much about our quantitative realities, depends on how resources are allowed to be utilized in environments as a whole. This particularly matters, given the fact that investment is not just about money, but about priorities for time value. No amount of money or investment will increase the availability of services providers who have derived marketplace value by virtue of their own relative scarcity. Too much monetarily backed investment also ends up chasing too little time backed investment, in part because of the lack of a marketplace for time.

The fact that the Keynesian model does not take money into consideration, is enough of a head scratcher as it is. A lack of consideration for the dynamics of time based product, only makes it more difficult to derive practical value from this model - either for purposes of monetary policy or for circumstance in the real economy.

Meritocratic Work Structure: Choice, not Necessity

When is meritocratic work structure a rational choice? It depends. Presently, meritocratic work structure is the basic nature of general employment - albeit in what is still relatively tight monetary circumstance. Meritocratic compensation draws from other resource capacity in the form of already existing wealth. When monetary policy proves insufficient, employers (in aggregate) can also wait longer before they hire workers. Hence employers logically "hold out" for the highest degree of skills capacity possible, to effectively compete with other institutions.

Meritocratic compensation is a natural component of institutions which tend to a single given spectrum of economic activity. However, asymmetric compensation processes now contribute to an incomplete marketplace. Everyone could ultimately benefit from a broader institutional framework - one capable of coordinating time and skill on more egalitarian terms. The symmetric compensation of time arbitrage, would eventually lead to greater labor force participation than is presently possible.

Even with the egalitarian (non rival) coordination of time arbitrage and knowledge sets, competitive constraints would still of course exist for time use options. However, those constraints would exist in group capacity frameworks. Given the changing nature of individual demand for services product, skills options wouldn't necessarily be abandoned due to the "all or nothing" skills demands of traditional employment. Non rival compensation can generate new wealth, but it needs carefully thought through organizational capacity in order to do so effectively.

Choice in group context also means one's skills sets will sometimes be matched for reasons of personal convenience. Those with desirable skills capacity always face real time constraints, a factor which would be taken into consideration for ongoing education in a wide variety of skills capacity. Coordination exists in an immediate and spontaneous sense, and also in terms of long term planning for ongoing services capacity.

One consideration in this regard, is system mobility. Just as some might choose meritocratic compensation for work where possible, others would likely desire to return to knowledge use systems as well. Likewise, some individuals may prefer the labor force participation of time arbitrage, who are not born into already existing systems. In some instances, some would gravitate towards non rival knowledge use, because of a lack of available work (in one's preferred disciplines) elsewhere. Occasionally, individuals might choose to work in knowledge use systems due to proximity, should local corporations set up operations where others would like to live.

Meritocracy is mostly problematic, insofar as the work conditions it creates are insufficient for full employment over long periods of time, particularly as resource capacity shifts into new frameworks. Even so, there may be factors in time arbitrage which would allow for greater knowledge use dispersal, than the rival conditions of meritocratic employment are able to allow.

Another thing to consider is that meritocratic compensation is always a greater possibility when economies are strong, and supply side conditions sufficient for hiring across a wide range of disciplines. Knowledge use systems could provide an additional support mechanism for nations, when it is otherwise difficult to maintain the work challenges which so many individuals seek.

Time Value as Front Loaded Growth

Time value has mostly been back loaded into the economic systems of the last century, through redistribution and other forms of asymmetric compensation. As a result, it's easy to forget that time value is where all other forms of economic value, actually begin. Are there ways to make up for the lack of time value, in today's economic frameworks? While it's not realistic to front load time value through much of the spectrum, it can still be restored at the margins. Doing so, would eventually help to overcome the present limits to growth, which governments and special interests have imposed in the global economy.

Insofar as economic activity is asymmetric, time value mostly exists in a meritocratic - or rival - capacity. When central banking focuses too much on credit dynamics, policy makers seek to support the capacity of those considered "credit worthy", instead of supporting a full range of economic participation. Given the fact that credit is logically a back end function of income potential (one would think), credit representation should be a back loaded aspect of economic activity - instead of a front loaded point of monetary origin which has superseded monetary policy too often.

Consider how Wikipedia defines front end loading.

Front-end loading includes robust planning and design early in a project's lifecycle...at a time when the ability to influence changes in design is relatively high and the cost to make those changes is relatively low. It typically applies to industries with highly capital intensive, long lifecycle projects.

Services capacity - with a little luck - could become a 21st century project for long term growth. Of course, the "highly capital intensive" nature of local corporations, would be greater coordination for human capital potential. Local corporations would front load time value, as an initial point of group coordination and wealth creation. Time value becomes quantifiable, once it is recorded as ongoing economic activity. As a result, much of what might otherwise exist as informal activity, would instead contribute to knowledge use formation and community stability.

Another aspect of symmetric or front loaded time value would be important for all concerned: accurate monetary representation (of both local economic activity and otherwise) on the part of central bankers. To this end, local corporations would keep records which would be more precise than what is presently on offer, for knowledge and time use in service formation. Even though this process should generate new wealth, the certainty of new wealth still depends on whether all economic contributors are taken into account, in a given monetary policy context.

While such an acknowledgement should seem obvious, oddly enough this is not always the case. For instance, when monetary authorities do not faithfully represent aggregate spending capacity, that means what should have been new wealth can be lost, somewhere in the (overall) system. For instance: before any supply side reform can matter, central bankers have to make it count on monetary terms. As James Alexander explained in a recent post, arbitrary inflation ceilings simply offset "the good stuff". Even though he was discussing the Eurozone, it's a problem that any nation faces, should monetary policy refuse to take productive (and hard won) supply side efforts into account.

Granted, many individuals are - and will remain - happy to assist others simply because they want to. Even though many have been inspired to pay these efforts forward, these processes still exist in relative economic isolation. Local corporations could create a stronger continuum, which contributes (symmetric) time backed money to the asymmetric structure of fiat monetary formation. Individuals would finally gain the option of utilizing time value as a basic commodity, should they decide not to seek monetary compensation for work through rival or meritocratic means. In the process, person to person interaction in coordinated settings would become quantified and recognized as new wealth.

Until now, meritocratic structure appeared sufficient for labor force participation. However, it is becoming apparent that not all meritocratic time value can be asymmetrically compensated from traditional production. It is time for symmetric time value to be a real part of wealth creation, and economic opportunity.

"Common Sense Education For Small Incomes"

The post title is in quotes because it mostly inspired the musings here. If only this were a definitive post on common sense education (sorry!),  given the title seems most appropriate for a "how to" book. Of course, I still daydream about local bookstores which might once again carry useful books for local services needs and more...even in small towns. Knowledge use systems would not only have to rediscover the kinds of education that local participants desire, but also be prepared for ongoing changes in this regard.

My original post title was "What if education had common sense goals?" In a recent post I also looked at education from the perspective of local commitments and time investment capacity."Common sense" is no longer as simple as it should be for learning purposes, because much depends on one's relative level of access in primary equilibrium. As a result, one needs to ask - common sense for who?

While "roads to success" are still in abundance for middle and upper level incomes, these strategies don't hold for lower income levels. As to the latter, reasoned planning for life events is on short supply from media or anyone else. If system stability is important in primary equilibrium, why doesn't it receive ample attention for the smaller incomes which sustain many business operations? As Shane Parrish (of Farnam Street) recently noted:

...so few of us design systems that incorporate duration as an element. We make them short term.

Common sense education would seek to strengthen local economies for the long term, through broad management of both practical and experiential knowledge use. More (compensated) coordination is needed for services product which today's services organizations often expect consumers to provide for free. Also, more economic definition is needed, for knowledge based assistance and skills which families are not always in a position to provide for their children. Plus, in the U.S., problems with Obamacare now have a sizable (and growing) portion of the population in various stages of "do it yourself" healthcare mode. All these areas are good candidates for the redefining of local education.

Even though traditional literature once emphasized maintenance trades as (long term) labor division strategies, those who have lived in areas with a lack of economic diversity, know a focus on technical maintenance isn't enough. Where economies are insufficiently diverse, skills sets need ongoing multiple "backup plans" for time investment, for the same reasons upper income levels need diversity in financial portfolios.

Rural areas - for instance - are like the canary in the coal mine for economic conditions. Since rural areas are the last to benefit from ongoing monetary flows across regions, they are among the first to suffer - even before recessions become obvious, elsewhere. Common sense education needs to provide means for local economies to generate their own wealth flows, so they are not in a constant waiting mode for economic vitality to return to prosperous areas first.

One reason people need to discover common sense education, is the fact that otherwise the bar keeps getting raised for access to primary equilibrium. In Joe Biden's announcement today that he would not be running for president, he also declared:

We all know that twelve years of public education is not enough.

Enough for what? When is more education ever enough? I believe in lifetime education, but for purposes of fulfillment, not as permission to participate in the workplace. If someone could explain to a member of a primitive tribe that we expect our children to be showered with twelve years of public commitment and property taxes, yet young adults come out of that system unprepared to contribute to anyone's circumstance, the tribe member would likely stare at whoever who explained this as if they were crazy.

Knowledge use systems would not only encourage students to assist one another with ongoing studies from a young age, students would be compensated for doing so. Chances are, this is a process which could also encourage friendships where otherwise, children and young adults often do not have sufficient reason to reach out to one another. While work and learning patterns such as this may seem odd at the outset, they could potentially lead to stronger community connections.

As I was getting started on this post, it occurred to me just how appropriate "small income" sounds, as contrast with "low income". Again, low relative to what? Small income hints at opportunities for growing an initial point of compensation, through a diverse range of investment potential. One gains a small income for helping others, and adds to income through personal resource utilization. Hence I'll use the term "small income" in the future, whenever possible.

Where is the Potential for Services Growth?

Tyler Cowen linked to a Christopher Balding post which is most helpful for me, because it explains an important concept in economist language that I've yet to do justice for in layman's terms. Hence I will include a fair amount of what Balding discusses in this post, with some additional thoughts and comments. While he wrote about the Chinese services sector, these dynamics apply to economies in general - which he also notes.

We are fortunate to have the speeded up circumstance of China joining other developed nations, because their broad and complex story is being captured in real time - even if still somewhat "misunderstood". Consequently, China's economic story exposes elements which can sometimes be missed when shifting resource use patterns evolve over decades, instead of years. Here's Balding, who notes the connection of the services sector to real estate and related financial services, and adds:

Financial services are widely recognized as a service but there are two important factors which imply we should at least recognize the unique nature of arguing for a healthy economy due to service sector expansion. First, financial services still derive the vast majority of employment, assets, and revenue from the major SOE commercial banks. Second, these banks give out the large majority of their loans, by some measures almost 90% to old industry firms that are facing large declines in revenue.

Regarding the overall slowdown in growth around the world: at the very least, there is some understanding that limits in real estate formation are arbitrary in the sense such limits are hardly necessary. Indeed, Kevin Erdmann's "decade long depression-level behavior of housing starts" is matched by what has already been a 15 year real decline in knowledge backed services formation and its associated income. These unnecessary limits to both services production and housing formation are finally affecting the outlook of old industry firms, because an insufficient amount of time aggregates (on the part of populations) are involved in present day production processes. This is something governments of all stripes need to come to grips with - sooner, rather than later.

Balding continues:

...if we strip out financial sectors from the tertiary sector, services have actually declined since 2000 and relatively significantly by probably at least 5% of GDP. Even if we look at other services, service sector contribution to GDP excluding finance is near all time lows. In other words, any rebalancing has come from the service sector feeding capital to old industry declining firms not from the growth of new firms or organic growth in services. 

Given the degree to which traditional housing and credit formation has been allowed - relative to government avoidance of time aggregate production potential - small wonder housing can statistically appear as though a boom, instead of the bust that has actually occurred. Even though aggregate spending capacity patterns show the nature of these overall declines (such as the U.S. has experienced), many onlookers still do not take the overall spending context into account. Here is the remainder of Balding's post:

The numbers bear this out. While listed A-share operating revenue for financial services and real estate has grown 17% and 31% annually for the last three years, wholesale and retail operating revenue grew at a mediocre 4% annually over the same time period. That is the complete opposite of rebalancing. 

I want to strongly re-emphasize that there is nothing here out of the ordinary in how things are classified officially. What does need to be recognized are what exactly is considered a service sector industry and their dependence on old declining industries. If we account for that, the picture looks decidedly different.

His emphasis on service industry reliance on old industries, also ties in with my explanations why it is not possible for government fiscal activity to supersede the potential growth capacity of monetarily based activity - despite the fact governments gained the additional wealth benefits of financial assets in the twentieth century. While governments might have had little choice but to rely on old industry to fund services formation in the past, that does not mean services formation should be expected to solely continue on these limited terms in the future. If long term growth is to be maintained, more production capacity needs to be extended to all citizens if for no other reason than making certain traditional production value is not lost.

Even though services growth slowed - due to its reliance on other wealth - new service patterns can be generated through local and direct wealth creation. What's more, the process can take place alongside flexible real estate patterns which do not require credit formation. Local corporations would provide what could be considered an alternative production to services equilibrium. Local knowledge use systems would exist alongside internal services and real estate formation.

These in turn would utilize time backed money to augment the fiat monetary systems of the present, so nations can regain confidence regarding nominal income (and aggregate time value) alongside capital formation. Potential for services growth still exists. Just the same, governmental reliance on meritocratic knowledge use may eventually become associated with the elite, as others seek to grow services systems directly through local and inclusive means.

Again...What is Economic Choice?

Believe it or not, this question is more important than it may first appear. Until now, economic choice has been mostly understood in terms of product capacity which is not directly associated with time value. As a result, the skills oriented marketplace for services, tends to short knowledge use options and time preferences. A lack of freedom in service formation plays havoc with multiple economic settings.

Some individuals would benefit from a marketplace solely devoted to the quantitative nature of time value. Presently missing components are not immediately obvious, for services product capacity is also tangled in social customs and cultural identities. Just the same, the potential for economic freedom in services can be summed up in four words which are not just economic, but psychological as well:

It's all about boundaries.

When do today's existing services make service providers and consumers feel good about the interaction? When do they make us feel violated, instead? There are few aspects of economic freedom more important for identity, than one's ability to maintain healthy boundaries with others - whether family members, friends, strangers or people in the workplace. Yet little attention has been given to the fact that meaningful services have a reciprocal nature at minimum, and often an experiential nature when given the chance to do so.

Part of the lack of services reciprocity is due to the intensive development of personal skills sets. As people gradually developed coordination patterns which expanded beyond local groups (with help from transportation infrastructure), skills sets were increasingly compensated for long training periods. In turn, spontaneous group coordination was lost - along with flexibility in skills use patterns - as skills roles came to be coordinated in more formalized settings.

Validation in the latter, also meant static definitions regarding what "should" be imparted to recipients. Rigid expectations for knowledge use made it difficult to apply personal experience, circumstance and interpretation to time based skills activity. Time based service functions were often predetermined, in ways which placed the emphasis on gaining access (or not) instead of results. Indeed, results could be incidental, and personal boundaries were also "put on hold" if they were out of sync with prevailing "wisdom".

Also, think about the wide variety of services which individuals are routinely expected to provide without compensation. How does one determine whether services should have an economic element? When we focus on endeavor primarily for ourselves, economic representation is generally not necessary. When we do something for others which compromises our time and resources, when and how should this be defined as economic? When we provide services for others, are we doing so willingly, and is there any underlying cost (for lost time) which is not being taken into account?

Services we personally provide might need to exist on economic terms, if their provision is neither our first choice or a personal favor. For instance, given changes in cultural expectations, a better defined services marketplace would be more practical than previous legal protections which were assigned before family formation moved from (internal) producer roles toward external consumer roles. Even though more production roles are now needed for family members, time arbitrage would frame this as local (external) mutual group support.

Back to the question of whether one's time use should be considered economic: we freely choose a self serve restaurant because serving ourselves is a preference for this particular meal. Fortunately, this choice on our part aligns with the preferences of restaurant management. Or, we may cook a meal for family at home in the evening because we are (culturally in the U.S.) happy to do so. One willingly waits in line for experiential product, as a "first" service choice as well.

However, when service organizations make us wait on the phone or in an office for 45 minutes, that is no one's first choice. Since there is no possibility of economic compensation for this task, involuntary waiting time is ripe for production reform. Re food production choice: imagine a domestic situation where someone expects us to prepare meals for them instead of gaining income outside the home. In some respects - even if room and board are a part of this arrangement - the service provider could be in a compromised position which either needs to be changed or recreated on more suitable economic terms.

Some of the worst violations in economic choice occur for individuals who lose the capacity to perform - say, 5 out of 200 different tasks in a given environment. Yet instead of having a time based services marketplace where they are free to negotiate for those five things (and stay in one's home), are placed in expensive services environments where they are forced to allow other individuals to perform three quarters of those 200 things for them. Many a strong individual has deteriorated in such services settings and it isn't pretty. True, it's often easy to think of compromised economic circumstance in gender terms. But when a marketplace loses vitality and complexity in some capacity, the marginalized can become absolutely anyone. Thinking in terms of gender, race or personal ability detracts from the basic economic issues at stake.

To say certain things "should not be economic" is missing the point, especially given today's lack of personal freedom in terms of time use with others. By bringing a voluntary nature to services capacity, many individuals would have better means to improve their lives. The more choices everyone has, the better the chances of success and prosperity for all concerned.

Government Intentions and the Zero Bound

Market monetarism is beginning to make gains, as Scott Sumner has noted in some recent Econlog posts. On one front, there is progress regarding consideration of negative interest on reserves. Even more important, is a growing realization that instead of being accommodative, monetary policy has been exactly the opposite relative to demand.

However I have to concur with Bonnie Carr's response to the referenced paper from Vasco Curdia of the San Francisco Fed. Even though the Fed paper is good news, as a CNBC report suggests, this is true insofar as the Fed may begin to provide more honest communication. According  to Bonnie Carr:

And there really isn't anything dovish here. It's basic macro and simply to the point of showing that the ZLB is the new normal...

For instance, an acknowledgement of the need to go to negative interest rates to stimulate monetary policy, is not the same dynamic as the supply side reforms which could have the potential to broaden marketplace possibilities. In the latter, greater capacity in aggregate supply would cause the natural Wicksellian rate to gradually rise. Consequently, negative interest rates on IOR would not be needed for any long period because real gains toward closing the output gap would have been realized, instead. However - that said - a negative interest rate is nonetheless expansionary, as Scott Sumner explains in this helpful and clarifying post.

The remaining problem (beyond not yet having gained a nominal target rule, of course)  is that zero bound territory extends into the future as far as the eye can see. This is also an issue of government intentions, for more than a passive response towards long term growth expectations is involved. Since potential supply side solutions are difficult to contemplate - given today's norms and status quo - policy makers have resorted to telling the public that this is as good as it gets.

Thinking about this, I was reminded of discussions at Scott Sumner's blog about four years earlier re the zero bound. Basically, he explained that the zero bound was not just an anomaly, it was a most unnecessary construct. In 2011, I don't think many of us realized that too many policy makers would abandon attempts to improve long term growth prospects. Who could have imagined then, that the zero bound would come to appear as "real" as it does now. As a result - even as market monetarism gains more advocates - the real economy will continue to generate problems for economic stability.

How might one think about present day government limits to growth in a broad framework? Government activity represents a substantial part of the marketplace, through redistribution and the financial gains of asset formation. Even so, assets result from income aggregates, which affects the wealth potential of assets relative to traditional production. Presently, knowledge based services, which could also be organized as direct wealth (hence marketplace growth), are still secondary in the sense of compensation from traditional manufacture and asset formation.

Even though developed nations were able to build services economies through increased consumption (more income parked in housing), consumers need access to production roles just the same. Too little attention has been paid to the production potential of aggregate supply, which in turn encouraged policy makers to short aggregate demand.

So long as government and special interests maintain control over services formation (in the U.S.) there are additional burdens on income aggregates. Given the fact too much services income is meritocracy based, income aggregates have become somewhat limited by default. Housing assets in particular are a reflection of this reality, as individuals are faced with limited choices for living and working environments. Where one observes tight monetary circumstance for housing aggregates, there is an insufficient marketplace for time value (as opposed to skills value) as well.

It is not necessary for governments to limit long term growth, even if they give the impression there is no other choice. Likewise, austerity is not necessary, but policy makers also need to be more upfront as to what they think austerity even represents. How do austerity concerns square with the misplaced notion that the world has seen "enough growth", for instance? Strange as this juxtaposition may seem, one often hears both arguments from the same vantage point. Perhaps the zero bound is little more than zero incentive to cooperative with anyone else, to get anything done. If so, those incentives need to be changed. The prosperity of future generations depends upon doing so.

Knowledge Use: The Most Helpful Roles

Recent limits to long term growth are raising questions about the future of services formation. One reason labor force participation remains low, is the degree of work which presently takes place outside of economic representation. Timothy Taylor, in a recent post about women and unpaid work, writes,

The ultimate constraint which rules us all is that a seven-day week has 168 hours. A gradual reduction in the time spent on unpaid activities, which have traditionally been the job of women, is part of what makes society better off.

While Taylor highlighted developing countries in the above linked post, a wide variety of services have too little economic representation in developed nations as well - and not just for women by any means. For example, today's services institutions tend to shift unpaid services time to both producers and consumers, wherever possible.

Even though these organizations meet budget obligations by doing so, there has been a remaining economic imbalance where other individuals end up incapable of meeting personal and family budget obligations. This particularly matters for families which have only one individual with economic access. In many instances, a single family income should not be expected to meet the time based services needs of other family members. Equally important, is the fact that governments do not have the resource capacity to meet such imbalances, which are better addressed by providing (compensated) access to knowledge use participation by all family members.

Previously, services formation was difficult in low population densities, since full time work for specialized skills tended not to be a realistic option. Fortunately, it is easier now to pool knowledge based resources, which makes it possible to coordinate skills networks, anywhere. As skills use becomes "part time" in cities, more options for services diversity open up in low density areas. Consider this quote from an article Time picked up from LinkedIn:

In the past the complexity/impossibility of resource pooling made it hard for most companies to use independent contractors on any large scale, even though many could really have benefited from doing so. So consumers paid more than we should have for products and services provided by people who were full-time employees, but who didn't really need to be...

Independent contracting of knowledge based services (in a marketplace for time value) would particularly assist lower population densities. Even now, services provisions for both producers and consumers are mostly met in cities - a process which presents problems for developed nations and developing nations alike. Local corporations would make it unnecessary for individuals to live in highly populated areas in order to participate in - or access - knowledge based services.

Sometimes it is still too easy to miss the forest for the trees, in considering services marketplace potential. For example, Catherine Rampell unfortunately focused on the gender wage gap in a recent article, which brought a retort from Arnold Kling. He basically asserted that a degree in psychology helps no one:

I am sorry, but psychology is not a utilitarian major. It is a self-indulgent major.

Apparently (one would hope) Kling sees it this way because of the lack of job opportunity in aggregate - particularly given what is expected in terms of time and resource investment on the part of those who major in psychology. Even though his reasoning may hold in the face of budget realities and "wannabee" career seekers, my issue is that psychology needs a chance to offer more practical time based marketplace product than has been the case thus far - albeit in new social and cultural terms. As more digital classes become available in the future with lower costs, these forms of learning will hopefully translate into more accessible forms of skills capacity at local levels.

Knowledge based systems could eventually fill much of the missing services marketplace gap, with the societal rewards which hold at least the same value as wage rewards. Mental health is just one of many valuable maintenance functions which needs to be utilized for its potential in a marketplace for time value. In earlier posts I've written of a hierarchy of economic activity, where maintenance functions in all fields of endeavor provide a base foundation for everything else. In particular, when societies become uncertain about the primary building functions which normally fund services, maintenance product could especially benefit from a more direct wealth creation approach.

A marketplace for time value would allow maintenance functions to directly contribute to wealth creation. In terms of mutual local support, mental health assistance can be as simple as a willingness on society's part to compensate individuals for just spending time with others. Finally, anyone who is somehow marginalized would not have to remain constantly alone. Often, those fortunate enough to engage in knowledge work through their adult lives, don't recognize what eventually happens to individuals who end up expected to perform work without this additional meaning. For instance, consider the lyrics of an old John Prine song:

Someday I'll go and call up Rudy,
We worked together at the factory
But what could I say if he asks "What's new?"
"Nothing what's with you? Nothing much to do."

Why has it been so difficult to imagine individuals as capable of carrying out both physical and knowledge based work through the course of their lives? No one should have to be limited to one choice or the other, despite differences in IQ and ability. Perhaps an expectation to choose several aspects of both physical and knowledge based work, would be a good cultural adjustment. In all likelihood, a lack of connection to knowledge based work is also having negative effects on life expectancy.

As one ages, unfortunately there are too many instances when family and friends are no longer around on a regular basis. Even as the mental health roles mentioned above can help in such circumstance, the ability to remain economically connected with local community through knowledge based work, would probably be the most helpful role of all.

Direct Democracy For Non Tradable Skills Settings

Could time arbitrage assist local skills so that direct democracy becomes possible? First, consider why direct democracy has not been possible for services needs, thus far. Ordinarily, once skills sets are exposed to (compensated by) other sources of wealth because of the nature of their investment structure, lower income levels become less able to coordinate skills sets through financial means. This is when lower income levels could benefit from the assistance of time value and coordinated educational capacity, as noted in a recent post.

Once time value becomes subordinated to skills value, time compensation benefits from unspecified amounts of resource capacity from the wealth of tradable goods structures. When time value becomes variably proportioned, group time aggregates can only be coordinated through pricing structures, instead of time use preferences. Even though upper income levels can (mostly) coordinate time value through this pricing structure, lower income levels fall away from participation through monetary coordination.

However, even though governments limited services capacity through assigned meritocratic time value structure, they still attempt to coordinate services capacity which does not actually exist. Hence the needs of lower income levels can slowly undermine group decision making processes, in markets that are solely structured through merit compensation. In these settings, knowledge may be made available to large populations, but it is only allowed economic context on the part of the elite.

Consider already existing arguments, why certain voting processes on the part of large populations "don't make sense". Once skills sets are reimbursed on meritocratic terms, they become exposed to limits which make voting processes seem unreasonable. Even though national health care systems still appear feasible, nations become ever more compelled to make this marketplace less accessible. Incentives become aligned for producers, consumers and third parties alike to avoid the need for the healthcare product wherever possible, because of the way the product is envisioned and structured. For most systems, meritocratic structure as the only services option, can eventually reduce the marketplace for many forms of services product.

I thought about these realities after reading a post from Angus, ("Kids Prefer Cheese"), a few months ago titled "The Powerful Negative Theorems of Economics", where he wrote about Arrow's Impossibility Theorem:

Simply, this tells us that there is no ideal, comprehensive way of aggregating individuals preferences into an aggregate choice. Arrow shows there is no mechanism that is non-dictatorial, satisfies independence of irrelevant alternatives, and pareto efficiency.

In representative democracy for large populations, voting for (representative) individuals is even further removed from desired services representation, than attempts to provide merit compensated time capacity at local levels. At national and state levels, opposing political factions attempt to cancel out the services options of "opposing" parties. Indeed, voting for politicians who "promise" to tweak services structures, is not useful in the same sense as voting for a product with one's money, which can at least positively affect marketplace availability (hence outcome) for tradable goods.

Time arbitrage would allow local populations to internalize what is normally assigned to political structures in terms of non tradable goods. One way to think about this process is a better understanding of an old phrase, "think globally, act locally". It's a phrase which needs an update for current times: think "locally" for non tradable services, investment and education, think "globally" for the resource capacity of tradable goods the world over. Fortunately, tradable goods need not be subjected to local decision making processes at individual levels, because the marketplace of tradables depends on world conditions. Whereas a non tradables marketplace sometimes needs time investment capacity for local decision making processes, in order to remain economically viable and stable.

Thoughts on Decentralization and Public Education

In a recent post which highlights a Reihan Salam article regarding public schools, Scott Sumner notes:

Democrats think Republicans are corrupt, and Republicans think Democrats are corrupt.

Many political struggles revolve around how money gets spent on time based services. When most services become indirectly funded through redistribution, voters end up in battles, trying to remove service options from one another. Since meritocratic skills compensation tends to rely on resources which prove impossible to quantify, there is an insufficient services marketplace for all concerned. How could decentralization overcome some of these problems? Scott Sumner suggests an option for local education:

Decentralization doesn't mean you can't have some tax redistribution to poorer neighborhoods. But it should be lump sum redistribution. And once you've done the redistribution then 100% of each marginal dollar spent on a school should come from taxes levied in the neighborhood that sends kids to that school. 

Only consider how many taxes are already apportioned this way, given the fact schooling is often the major financial responsibility for municipalities in the U.S. These costs are also reflected in local rents, and home ownership implies a permanent obligation to local education. Even so, "returns" to this basic community responsibility play out differently, depending on income levels. How might one think about parents and students in this regard?

For upper income levels, benefits for parents and students alike are generally quite worthwhile. These schools are more likely to tap into the dialogue, logic and reasoning one expects to utilize in more prosperous regions. Upper income levels can take part in relatively open ended patterns (across regions) of mutual economic sustainability. Here, services formation is possible based on what monetary coordination can generate. As a result, students from higher income public schools, can tap into existing resources which extend well beyond the boundaries of local responsibility for education.

Even though other schools may aspire to provide similar attributes, this form of economic entry is somewhat limited by definition. For lower income levels, a lifetime of school tax obligations in local community might not provide sufficient reward for the commitment involved. These students aren't provided with the skills sets which many workplaces now require. But the biggest problem is that public education has not provided sufficient means for community members to assist one another in their daily lives. Knowledge use systems could address this, by making it possible to create services diversity.

Due to the fact lower income levels have insufficient income for needed services, skills value also needs the supplementation of potential time value. Knowledge use systems would allow educational efforts to go well beyond the teachers which would otherwise be hired for specific subjects. Often, basic subjects can also be tapped through books and digital media, and supplemented with the coordinated time value of local residents. Each individual would have the option of "hiring" local private tutors through matched time value, when needed.

Over time, lower income levels could generate a wealth of skills and resource capacity which otherwise would not have been available to them. Time arbitrage gives local skills use "votes" to contribute to service formation, in contrast to services limitations which governments are otherwise faced with. New wealth is possible through matched time value, and local property taxes for education would gain the chance to evolve to more useful frameworks. Education on these terms would provide a continuity to community formation, and knowledge use on more sustainable terms.

Why Time Backed Money?

Time backed money would compensate mutually coordinated time at local levels. The local corporations which would be responsible for these functions, could promote greater diversity in knowledge based services than is presently possible. It is the lack of a marketplace for time value, which means hard choices for knowledge based production and consumption options, otherwise. Even though meritocratic skills formation makes sense, monetary compensation on these terms leaves an incomplete marketplace for services and to some extent, other forms of production. In present day economies, a lack of services formation can also translate into lack of demand for traditional production and asset formation.

While time backed money serves as a starting point for new wealth formation, the time arbitrage that it would represent, leaves no residual obligation in terms of other resource capacity or taxation. This is why mutually compensated time would make new wealth formation possible. Economic activity which is backed by matched time sets, would not have to "lay claim" to other resource capacity or taxation obligations. Even though skills would not be rewarded based on merit, skills capacity would not face arbitrary or rival competitive limitations. Hence local group coordination processes would allow cumulative knowledge gains to be measured and recorded over time.

One advantage of time backed money, is that it would be utilized through investment settings capable of building wealth capacity, without need of loan formation. Human capital as mutually coordinated, would serve as a valid point of entry into larger economic systems. This process would make it easier to determine how monetary flows evolve between changing aspects of resource use and the individuals involved. Presently, too much of central banking is structured around what should be an end point of wealth generation - instead of a beginning point: housing. Consider how banking has changed since its early days in the U.S. for instance. From "The Great Tax Wars", page 12:

Before the Civil War, the United States was populated primarily east of Kansas and on the Pacific coast. It was dominated by small business and farmers dependent on staples and manufactured goods from abroad. Americans kept their investments in their communities and they used local currencies issued by their own banks. Thousands of different paper currencies, some issued by banks and some simply bogus, circulated as money among Americans. The national government was tiny with little power to oversee this chaos. The national government delivered the mail, collected tariffs and oversaw foreign affairs but did little else.

This book passage stayed in my mind long after an initial reading, as I reflected on the disparate economic processes governments gradually assumed on "behalf" of their populations. As governments centralized financial endeavor, redistribution and changes in production patterns, some coordination at local levels was lost - with little to replace it.

However, the bigger concern was the degree to which (government represented) non tradable sector activity became reliant on the continuing gains of tradable sectors. This has meant increasing budget problems locally, and less ability to maintain employment levels where economies are insufficiently complex. As growth in tradable sectors continues to slow, local economies now need to approach their non tradable sectors through more innovative and inclusive means. Time backed money - in particular to support local services coordination - would be one way to begin the process.

There are many contenders for economic endeavor which cannot readily be backed by existing resource capacity. Only consider the fact that more investment is needed, and yet the terms on which investment tends to be defined, prevents the participation of many who are in greatest need of investment opportunity. Broader investment patterns would go a long way to alleviate the uncertainty which now exists, regarding aggregate investment potential. Time backed money would provide means to back human capital, time value and resource use at the margins. In turn this would make it possible to make room for valuable knowledge use and services options, without making too many demands on budgets which represent already existing resource capacity.

What is Happening to Free Trade?

According to Noah Smith, free trade is now being questioned in circles where - not so long ago - support appeared as though quite certain:

...economic theory has been overtaken by macro events. The full-fledged entry of China into the global trading system since 2000 has been hugely disruptive. The lost jobs and vanishing industries have become impossible to ignore...The simple logic of free trade, so familiar from Econ 101, is either failing or ceasing to be relevant. Some astute economists are now claiming that the old formulation was never airtight in the first place. 

Wait, what? From Dani Rodrik, per the link in Smith's quote: "Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice." Even as Dani Rodrik appears to doubt the efficacy of free trade in the above quote, consider his suggestions for Greece in "The Mirage of Structural Reform". Per the Project Syndicate article, Rodrik reasons that given a lack of results from structural efforts (in terms of short term growth), more emphasis on tradable goods is needed. In other words, what Rodrik suggests for Greece, is what many economists still consider the epitome of free trade: "The absence to date of a single minded focus on tradables has been costly."

Okay...so what gives? How does one reconcile doubts regarding free trade, with calls for more free trade? None of this is to belittle Dani Rodrik's reasoning, but to note the discrepancy in what economists and policy makers believe to be possible or not possible, in terms of wealth creation. Without really thinking the matter through, politicians and economists alike speak of bringing traditional production "back home". Unfortunately, it's also tempting to believe this strategy would provide greater support for much needed services. However, instead of trying to undo the gains of globalization, it would be far better to generate wealth gains for services through more direct means. It's the non tradables sectors, which need new focus and initiative at home.

Knowledge based services were never sufficiently exposed to the marketplace, as they came to play larger roles in the 20th century. This is the elephant in the room: the economic factor which is in desperate need of new definition, before nations begin to backtrack on the progress of recent centuries. Even though the traditional production of tradable goods can continue to support services formation up to a point, this form of wealth can no longer be expected to generate the full services marketplace which so many invested in, prepared for, and expected to take part in as consumers.

Too much human capital remains locked in a secondary role, in terms of aggregate supply. A marketplace for skills value, has displaced much of the economic environment which once responded well to time value. More than anything, a lack of competitive options for time value, has limited the ability of nations to support the wealth potential of human capital.

For free trade to flourish well into the future, it needs a marketplace for time value, alongside what already exists for skills value. Professionals of both the political left and right remain dependent on the tradables markets they question, for the resources which compensate the meritocratic structure of skills value. Unfortunately, not only does this limit knowledge use in non rival capacities, it limits the coordination of many knowledge based service functions to that of upper income levels. In turn, this makes for hopelessly divided politics as various factions struggle over the services which they hope to maintain.

However, there is plenty of resistance to production reform on the right as well. Free trade works fine as a slogan, until it threatens to sacrifice a few "sacred cows". Tyler Cowen linked to a recent article about the collapse of the libertarian movement, which prompted plenty of discussion in the comments. Some also wanted to know...libertarianism: what's in it for the marginalized, or poor people? From the article:

Just because people buy certain arguments when it comes to civil liberties or foreign policy does not mean they are more likely to buy them on taxes, spending or regulation...Libertarians love to preach the virtues of markets. Yet in the "marketplace of ideas", their bundled product has been regularly and thoroughly rejected for over a century. Until libertarians acknowledge that market verdict and re-think what they're selling, or both, they will remain on the margin of American political life. And for friends of liberty, that would be a tragedy.  

Fortunately, freer markets can be sought through means which need not threaten existing systems. Time arbitrage would generate free trade in services production: not just for individuals who seek challenges beyond today's marketplace, but for those of limited means. The benefits of globalization need not be lost to the fears of present day policy makers. Free trade in knowledge based services is a real possibility, but it needs to be approached in small experimental settings, instead of being imposed on groups who already have adequate means to coordinate knowledge use and services among themselves.

Non Rival Pragmatism, and Rival Creativity in Knowledge Use

Tim Harford asks in a recent post, how long should copyrights last? He feels that ten years should be sufficient, given the fact that

Most books, films and albums enjoy a brief window of sales.

Something worthy of note in the above example: these are also experiential forms of knowledge based product. Experiential product is what first comes to mind, as appropriate compensation for rival creativity. Rival creativity tends to generate product which can be replicated well beyond one's personal time constraints, and would be considered normal value in exchange with all the associated risks. Whereas non rival pragmatism can be likened to practical, value in use knowledge sets which are used as needed and in the time capacity one actually holds.

Also, rival creativity can be expressed as time based defined product - however the linked post explains defined product mostly as the non rival pragmatism of knowledge use systems. In contrast to "partial" or incremental knowledge use in time arbitrage (when time value is the defined product), experiential rival creativity may be a complete representation of knowledge based product, from producer to consumer.

Rival creativity is associated with individuals more often than institutional settings. In the latter, knowledge based contributions on the part of individuals tend to be downplayed and undefined, in relation to the final product which is ultimately sold. When creativity is paramount, it is best expressed through product which can be replicated beyond personal time capacity. Even in knowledge use systems, rival creativity would be no different from one's aspirations in any given economic circumstance.

Knowledge use systems would seek to broaden wealth gains through the non rival pragmatism of time arbitrage. Consider the products of rival creativity and the long copyrights they now hold. Still, the bigger problem is knowledge which was once widely shared, and now trapped in institutional contexts. How so? Many forms of useful and necessary knowledge cannot be (economically) compensated, due to their own merits. Instead, this cumulative knowledge wealth has been inadvertently bundled with specialized skills sets, alongside current knowledge applications and methodology.

As a result, much of what would otherwise be non rival knowledge use, has been pushed into rival settings. Prior to the twentieth century - when time value was often utilized spontaneously - non rival pragmatic knowledge was still capable of dispersion across entire populations. Today, many aspects of pragmatic knowledge are institutionally contained, in settings where information "tidbits" are spread through the media to entice individuals to enter the expected consumer roles. For instance, preventative maintenance generalities "pose" as non rival knowledge, but rival time value has little room for real contributions in this regard.

Consider how Paul Romer places these concepts into larger context. In an October 4th post ("Nonrival goods after 25 years"), he explains:

Rivalry and excludability map cleanly onto the mechanism design to aggregate theory, which starts with a specification of preferences and production possibilities and investigates the mapping from the rules that a society adopts into equilibrium outcomes.

He follows this with "Here is the key. Rivalry and its opposite nonrivalry are assertions about production possibilities. Excludability depends on a policy choice about rules."

Joshua Gans commemorates Paul Romer's contribution to the literature in a recent post, and notes:

The Romer model's central premise is that growth of knowledge is cumulative. New knowledge builds on past knowledge. This is what makes knowledge different from physical capital.

Even though there have been many historical moments when human capital contributions were cumulative, some of that has been suppressed in recent decades. Fortunately, coordination efforts in physical capital can be quite cumulative as well. Only consider how additional resource capacity has contributed to the spontaneous coordination which occurs in municipal environments.

What presently inhibits knowledge use in terms of cumulative wealth, is its secondary categorization in terms of hired participants, rather than free agents. In earlier centuries, many who contributed to knowledge patterns were often self employed in more than one capacity. Those who still directly contribute to knowledge based processes, tend to do so in ways that are relatively non rival.

So long as knowledge use remains regimented as secondary wealth formation, i.e. reliant on the proceeds of traditional production, knowledge based services may be limited in their ability to maintain current levels of output. The fact that knowledge use has yet to be tapped directly - either in terms of accurate measurement or time use - accounts for the fact that other forms of wealth have proven more cumulative than knowledge use in recent decades.

I will need to study Romer's work further, and also hope to gain a better understanding regarding his issues with the Robert Lucas model (of perfect competition). Knowledge use needs more direct representation in wealth formation through non rival roles, or else its quantitative capacity for income aggregates remains uncertain. Does Romer take the present day secondary role of knowledge in wealth creation into account? I am not yet certain, and this greatly matters in terms of long term growth potential.

Sorry, But Maintaining the Status Quo is not "Courage"

Why so? I'm not the only one who would have preferred a different book title from Ben Bernanke: one which was less about "bragging rights" (huh?), and more about the fact his tasks at the Fed involved difficult decision making processes. Oh, to be a fly on the wall of the bookstores where customers see this latest publication spread across the table. What must they think?

His title also attributes a historical framing for the Fed which is not quite accurate. How much courage has really been involved in the Fed actions of recent years? If the Fed "saved" the banking system (in lieu of other things...) responsibility for doing so was already "built in", even if the public questioned the integrity of doing so this time. Had the Fed not bailed out the banks, the fallout would have extended well beyond the banking system. Why, then, should it be necessary to boast about doing what the Fed was expected to provide in the first place?

There would be little reason to question Bernanke's "job well done", if the Fed had not neglected other considerations - specifically, full monetary representation for the public as a whole. The greatest tragedy, is that few realize the full extent to which central bankers are still willing to neglect aggregate spending capacity, even after the damage of the Great Recession. Through the convenient language of inflation and interest rates, central bankers have been able to keep the focus on banking, finance and governmental obligations, instead of what has been lost in terms of job formation, business formation, and self employment since the Great Recession.

In spite of extensive media coverage which backs central bankers in terms of (imaginary) inflation and interest rates, economists and others are starting to recognize the fact that the Fed downplays what is actually at stake. This likely has bearing why onlookers were exceedingly cautious about the idea of a central bank, a century earlier. Sure enough, in the Great Depression and again in the Great Recession, central bankers would neglect to cover aggregate spending capacity (total spending or nominal GDP) in favor of other priorities.

The measure of GDP reflects how all individuals participate in the economy. But once policy makers decide that "enough" money has been generated, full economic participation could be neglected again, without a level nominal target. These are the times when policy makers use imaginary inflation as a cover, for the fact money is being shorted in the economy. Instead of innovation, some sectors simply increase costs - a process which appears as though inflationary. Yet policy makers panic about increased costs in aggregate. Unfortunately, that means punishing others through the loss of jobs, self employment and business formation, instead of taking overall obligations and existing monetary commitments into consideration.

At the very least, some at the Fed have recognized over the years, that it makes little sense to insist on arbitrary cutting off points in terms of monetary representation. The need to honor aggregate spending capacity, as Marcus Nunes notes in a recent post, has come up plenty of times in FOMC discussion. For instance, in minutes from 1982:

MORRIS. I think we need a proxy - an independent intermediate target - for nominal GDP, or the closest thing we can come to as a proxy for nominal GDP because that's what the name of the game is supposed to be...

What strikes me about this quote was that the speaker recognized just how central the concept of a nominal target is, to the actual task of the Fed - even though total spending has scarcely been emphasized to a degree that the public knows its importance. Total spending. Why does something as basic as this, get lost in translation?

Bernanke now dismisses what amounts to (faithful representation of) aggregate spending capacity by pretending it would be difficult to achieve, and that it could somehow lead to undue inflation. Perhaps I'm wrong - and indeed I would hope to be - but it's hard not to suspect that Bernanke would prefer to disregard aggregate spending capacity. Does he believe that income aggregates are not as important as either the activities of government or finance? The activities of the latter group do not an economy make, at least in most places I have ever visited.

And had the public known 100 years earlier that it would eventually come to this, who would have remained comfortable with highly centralized banking? One has to wonder. In a sense, Bernanke was not even able to maintain a full status quo, because Main Street never really fully recovered from the Great Recession. And yet somehow, saving the banks was supposed to be enough.

When Does Monopoly Affect Total Output?

How to think about monopolies in terms of total output? For me, the more challenging aspect of this subject is the degree to which tradable and non tradable sectors are affected by centralization and decentralization. Potential monopoly effects can play out quite differently, depending on whether artificial restrictions in basic product formation (i.e. needed by "everyone") affect output aggregates.

Centralization often says "do it this way" (production patterns), which generally works well for tradable goods separate from time value. Repetitive patterns need not affect aggregate quantities, in this instance. However, when centralized services say "do it this way", they do so in an attempt to make fewer time based services necessary. Hence less time based services product, equals less aggregate output. Granted, centralized non tradable sectors do this to save money. But services formation also has the capacity to be organized in ways which generate wealth directly. In other words, time arbitrage would not have to cut back on the services product which is actually sought, as a means to "better" productivity.

An additional aspect of missing output becomes apparent, when important facets of knowledge use are limited to certain regions. Even the output of of housing and business formation, can be directly affected by the degree to which knowledge based services access is ultimately allowed.

When traditional production growth slows - as is presently the case - limits in knowledge based services production can affect housing formation at aggregate output levels. There is a likelihood that restrained housing options negatively affect the Wicksellian rate of interest, for instance. I was reminded of a recent post about this subject when Nick Rowe asked, "Could increasing monopoly explain declining interest rates?" He answered with a tentative "yes". However, monopolies which represent private interests and tradable goods, are less likely to contribute to economic stagnation, than the monopolies of government associated non tradable sectors.

If nominal (aggregate) income is considered, the monopolies which negatively affect total output are more closely associated with time based product. When one simply hears that more productivity is needed in the marketplace for instance, this particular framing of this issue is too vague for concerted action, hence leaves the onus on no one, or no institution, to remedy. In the above linked interview with Ben Bernanke, once again he never mentioned that the Fed made the initial stumble which led to the Great Recession. The Fed let down the marketplace in terms of monetary representation, before the other stumbles which followed. If Bernanke has been aware of the monopolies which limit output, as far as I know he has kept that knowledge to himself.

And after the Great Recession, few policy makers are really getting the message, that more individuals need to be participating in the economy than is presently the case. More productivity also means more economic activity and monetary representation than has actually occurred. Just the same, the way Bernanke framed his message regarding sluggish output, does nothing to clarify that fact.

Think about what happens, when non tradable sectors push services outside the realm of economic measurement. These institutions also "save money" when the client does as much of the service as possible for "free". Indeed, some may even become quite proficient at doing so. Problem solved on the part of institution and client...right?

Not so fast. Someone may have adapted (in spite of  unemployment), by generating useful knowledge based habit and ritual. As focused and purposeful as this activity is, it is not economically productive. When individuals are not able to replicate such activity through economic measure and compensation, their efforts gradually lose the ability to contribute to a more stable whole. In other words, too much services product is being generated much as agriculture was once produced: self-sufficiently, with little in the way of added value for groups as a whole.

Many of these activities have little to do with normal domestic responsibilities, and could actually be considered a drag on measured output. There is insufficient organizational capacity for knowledge based services efforts - either economically or socially.  Present systems are more fragile than they appear, for too much human capital potential has yet to be harnessed. It's not the digital realm that is problematic for unmeasured wealth, but monopolies in non tradable sectors which leave too many services based maintenance strategies outside of institutional walls.

Some may think that I am arguing for dilution in divisions of labor (i.e. not "sufficiently" specialized), because small population densities would need to share divisions of labor more widely. But present day low population densities result in "do it yourself services" formation which is almost completely non economic, by comparison. In aggregate, the result would eventually be more specialization in knowledge capacity - not less. Systems which bring voluntary service formation into economic measurement, would gain skills capacity over time. The important thing is to work towards a greater degree of knowledge use dispersal than is presently the case. In this new measured productivity, real economic output gains would be the eventual result.