State Capacity, Endogenous Design, and Exogenous Wealth

What is state capacity still capable of contributing to modern economies? In some important respects, state capacity is no simple matter. Yet there is plenty of wishful thinking on both sides of the political aisle, as to what governments "should" be able to accomplish for long term growth and prosperity.

Not so long ago, the governments of advanced nations were better positioned, for fiscal policy to function as an active component of economic dynamism. However, as commitments to special interests and citizens in general have grown, fiscal policy has gradually become better suited as an economic stabilizer, than for additional growth prospects.

Perhaps this is a reasonable outcome, for national governments which have long depended on endogenous monetary design. Much of this capacity exists quite separately, from the vast exogenous monetary wealth that extends well beyond national borders. Yet the more tangible nature of the latter is largely due to tradable sector activity as our primary source of wealth origins. Consider how crucial are the roles of exogenous monetary wealth. Should any global calamity reduce this capacity, the ability of national governments to function normally via fiscal policy would be immediately compromised. Despite the supporting role of governmental endogenous design, exogenous wealth generation is still central to long term economic stability.

Nevertheless, the relationship between endogenous and exogenous sources of wealth has become so complex, one can be forgiven for imagining monetary realities as solely endogenous in nature. The main problem with endogenous monetary creation, is that populations can become too dependent on future forms of resource reciprocity, making individuals less inclined to seek direct reciprocity with others in the present. Even though future commitments in the form of monetary wealth can be quite versatile, they should not be be relied on to such an extent that people forget how to apportion time and skill for mutual reciprocity in the here and now.

Too much reliance on endogenous future wealth to fund today's services, may lead to excess passive monetary holdings in the GDP of nations. The dynamics of general equilibrium are essentially defined by interactions between the primary markets and the secondary services markets of future obligations. When expectations become too rigid in secondary market flows, sectoral balance is gradually disturbed. Today, there are rigid expectations in housing and time based services, which have contributed in turn to outsized expectations elsewhere in the economy - for instance levels of income supposedly now "necessary" to live normal lives.

Any efforts to expand on state capacity in the present, are going to run headlong into these expectations which have led to extensive budgetary obligations and social commitments. Producers and consumers alike are heavily vested in these particular alignments, which largely define how domestic wealth is constructed. In a post which reflects on state capacity, Scott Sumner explains:

...one aspect of state capacity is the ability of countries to act in a way that is seen as desirable by a consensus of people who don't have a special interest to inhibit change. A government that is able to "do the right thing" has more state capacity than one that does not, even if somewhere between 1% and 40% of the time the "right thing" turns out to be wrong.

Once societies rely on inefficient centralized coordination patterns, citizens move further away from a consensus on how those patterns should function - all the more so when millions of citizens are involved. Scott Sumner has often noted his own belief that a nation's democratic potential to achieve the "right thing", is likely only feasible in decentralized settings.

However, part of the problem for decentralized decision making in the use of knowledge and skill, is that special interests in the 20th century sought out national protection for how skills and knowledge could be utilized at local levels. Consequently, the U.S. may not be able to devolve important skills and knowledge use decisions to local levels in the near future, in a general equilibrium capacity. For this reason, I've suggested defined equilibrium settings which could create more accessible environments for human capital potential.

Time arbitrage would make it feasible for local citizens to gradually build stronger forms of democratic governance. Possibly the greatest benefit of time as symmetric wealth value, is that it would allow time to function as an exogenous or original source of wealth. Ultimately, time arbitrage could build upon decentralized settings in ways reminiscent of the organizational capacity of tradable sectors.

The knowledge use systems of time arbitrage, would make it possible for participating groups to bring aggregate time value into better balance with other forms of exogenous monetary wealth. Once time units become capable of purchasing other time units, the resulting new commodity standard would allow time to function as a reliable wealth source. Time as direct resource reciprocity would place (gently guided) mutual assistance into tangible and primary market forms. As an exogenous wealth source, time arbitrage could gradually help to reduce the political pressures and expectations that state capacity now faces.

What's the Point in Work With Limited Pay?

For some - regardless of past earnings - this question may appear to have a simple answer. There isn't! Yet plenty of work we perceive as either enticing or necessary, takes place via no monetary compensation to speak of. How to think about this reality?

What encourages us to choose the work we are willing to do, regardless of compensation? After all, much more is at stake than a "fat" paycheck. By way of example, voluntary work we deem desirable, may either contain the internal reward of intellectual challenge, or represent our sense of duty to others. For that matter, work of a seemingly mundane nature is worthwhile, since daily chores and routines play important roles in maintaining our connections to our environments. Some will likewise sacrifice reliable paychecks to work on autonomous terms, particularly since doing so makes it simpler to juggle competing responsibilities.

Nevertheless, we find most aspects of work more meaningful, if we aren't constantly having to worry about keeping a roof over our heads and food in our pantries. Should low pay work appear insufficient for meeting basic needs, some will refuse to work for others on those terms. And yet there's plenty of work needing to be done, which for the most part can only be paid poorly. Consequently, progressives and conservatives alike are discussing the possibility of creating either "living" wages, or else wage subsidies as government support for employees (via their employers).

Even though I'm pessimistic as to whether either approach is actually feasible, I'm an optimist about the possibility of creating local environments which better reflect low to mid range wage capacity. Supply side innovation for our non tradable sectors, could create greater personal security and stability, for those whose primary work only gains minimal monetary compensation.

So: Consider the range of work possibilities we might consider for ourselves if we don't also have to worry about keeping a roof over our head, and food in our pantry. Would relative financial stability change our mental framework as to what is possible?

Regardless of automation and AI, modern day economies are likely to need a full range of skills complexity in the near future. That said, a lot of employment options may not pay quite so handsomely as before. One problem in this regard is that existing municipal government budgets may become stretched to the breaking point - an event would lead to knock on effects elsewhere in the economy as well. Even though millions continue to seek high compensation for personal levels of high skill, the reality is many budgets will come up short for this human capital approach. Indeed, while lower skill work has been displaced to some degree by automation, AI is a more recent technological development which could impact high skill levels, especially if it becomes utilized in response to budgetary limitations.

Eventually, more cities and communities are going to need to redirect extensive resource capacity to basic elements of infrastructure maintenance. Hopefully, this will encourage the creation of infrastructure and services which don't cost so much to operate and maintain in the first place! Once we have more local settings which are easier to maintain, more individuals may ultimately find value in pursuing intellectual endeavour which does not necessarily come with a large paycheck, or a pension for that matter.

Another consideration, is that the twentieth century redefined how we perceive many non pecuniary obligations to others. These cultural shifts are quite substantial and are still having ramifications. One reason a marketplace for time value is needed, is to restore important forms of mutual assistance which have essentially fallen by the wayside. Also, the use of skills arbitrage for widespread employment, has contributed to increasing physical distance from friends and families as we age. Time arbitrage - given its encouragement of physical proximity for economic activity - could help restore mutual assistance in ways which allow us to rebuild trust locally.

Should people refuse to work for "peanuts", often there are good reasons why. Fortunately, we can create new forms of institutional means which make it more worthwhile to do so. One important aspect of these processes is greater economic security, via innovation for more affordable local environments. Plus, we commit to a restoration of personal workplace autonomy, for participating individuals. Why so? Only recall that one's ability to personally manage workplace circumstance, is a major reason why people are often willing to work for less money. And even though making room for the personal autonomy of others would include occasional inconveniences on our part, only recall how much we appreciate it, when others extend to us, the same privilege of personal autonomy.

Decentralization For The Greatest Good

When many rules have centralized origins - especially in large populous nations such as the U.S. - governments struggle to achieve the greatest good for the greatest number of citizens via taxation. The fact that utilitarian outcomes aren't easy to come by for diverse populations, helps explain why policy makers of opposing parties have become less willing to compromise. So why do we insist on imposing the same sets of requisite rules and standards on everyone? Why can't our economic freedoms be more closely associated with the possibilities of economic diversity, so that all citizens might live in settings where they can create good lives for themselves and others around them?

Nevertheless, one may take comfort, in the fact rigid expectations are nothing new. People have attempted to impose one size fits all regulations and social requirements on one another for a long time. For instance, even though Walden was published in 1854, Henry David Thoreau details how the social expectations around housing, contributed to the impoverishment of many in his time:

Most men appear never to have considered what a house is, and are actually though needlessly poor all their lives because they think that they must have such a one as their neighbors have. As if one were to wear any sort of coat which the tailor might cut out for him, or, gradually leaving off palmleaf hat or cap of woodchuck skin, complain of hard times because he could not afford to buy him a crown! It is possible to invent a house still more convenient and luxurious than we have, which yet all would admit that man could not afford to pay for. Shall we always study to obtain more of these things, and not sometimes to be content with less? Shall the respectable citizen thus gravely teach, by precept and example, the necessity of the young man's providing a certain number of superfluous glowshoes, and umbrellas, and empty guest chambers for empty guests, before he dies? 

Sometimes, societies impose such standards as a way to exclude others who they believe cannot adequately contribute to the needs of given communities. The problem however, is that more communities aren't created with infrastructure which accurately reflects what many individuals could contribute to the well being of all concerned, given the chance. Where, exactly, are excluded individuals and groups expected to go, especially when there are few domestic markets competing via product innovation, to enrich the production potential of lower income levels? And why haven't such individuals already gained the economic freedom to create anew for themselves, what many institutions have proven reluctant to provide?

Social expectations around housing requirements in particular, have proven especially harmful for the bottom 50% of working adults in the U.S. without sufficient income to live where reliable work can readily be found Even though lower income levels have been losing real wage capacity for decades, we have scarcely begun to discuss supply side approaches which could lead to more positive outcomes.

Alas, no one can realistically pretend that trends for low pay work will be reversed soon. We need economic options which allow us to bypass the sticky markets of today's extensive non tradable sector requirements, so that low wages will go much further than is presently feasible. Decentralized local settings which more accurately reflect what small incomes are capable of, could give millions new hope. Such settings would have far more ability than any centralized government, to create the greatest good for the greatest number of citizens. Defined equilibrium for housing, infrastructure and services would also make use of limited regulatory patterns, for groups which find mutual assistance a way to improve the well being of all concerned.

Consider as well that when it comes to housing, one need not classify Thoreau's housing sentiments as anti-materialistic. It's one thing to disavow material possessions in order to seek other time use options, yet altogether another to disavow certain forms of consumption which many individuals can't realistically afford in the first place. Life is much easier when we can accept such realities and move on, instead of having to constantly struggle with income differences in the face of one size fits all regulatory absurdities. People should be able to make low cost choices where desired, yet still have plenty of local economic options to lead meaningful and respectable lives.

A supply side approach would allow us to take the focus off struggles concerning aggregate demand and government "solutions". Doing so is all the more important, since governments hold considerable responsibility for the centralized consumption regulatory barriers which impact the lives of low income groups. Let's build decentralized settings where non discretionary costs might finally come within reach, of millions who seek to make the most of the resources they actually have available.

Some Productivity "Mysteries" Are Solvable

One often hears, "To what extent does technology contribute to productivity?" But an equally important question is, "What else may be closely involved?" For instance, when do societal expectations of what comprises quality product, get in the way? Are those expectations creating additional burdens for our already scarce time use options?

If quality product expectations (such as housing and services) keep requiring ever more of our scarce economic time, more citizens will end up excluded from basic market processes in the years ahead. Essentially, this means aggregate productivity is also being lost, despite productivity gains which may still accrue at upper income levels. Markets aren't as beneficial as they seem, if the costs of basic life necessities leave little room for discretionary spending options for millions of people. On the other hand, free markets are a major boon for all concerned, if they offer accessible basic products and services for all income levels - thereby creating a base of sustainability. Should this in fact take place in the near future, some of our production mysteries will also have been solved.

Certain features of our non tradable sector activity have been reducing aggregate productivity gains for quite a while. Nevertheless, there's good news, for we have the ability to simplify some of the current confusion as to potential productivity gains. How so? One of the most basic elements of productivity gains which still holds, is how such gains accrue to our advantage when they give us additional time options, monetary options, or both. Importantly, even though we now inhabit a services dominant economy, this is as true as it ever was.

Productivity gains, when they do occur, tend to take place in more than just a single dimension. An apt 20th century example for productivity benefits at multiple levels, were washing machines which entered our homes around mid century. Not only did we realize wealth gains from increased aggregate output (and output scale created a positive wage benefit), washing machines freed up lots of time for other activities as well.

Only imagine how easily we could realize similar production gains today, by adopting lightweight yet strong materials for a broad range of building functions. Indeed, many building components could combine to create relatively small structures (compared to today's square footage requirements), simple enough in form to require a mere fraction of the maintenance and renovation which is now necessary. These new living/working options would restore millions to a sustenance level of activity at the very least. In other words, far more individuals would remain closely attached to wealth creation processes, than if they were dependent on others for shelter. Any society that forces undue dependence through excessive living costs, will also tend to create less overall output or wealth. Whereas greater independence in living and working arrangements, leads to more personal choice for countless other market options, hence greater output and productivity gains.

Let's reduce the production mysteries in our dialogue, by addressing how arbitrary product definitions and social expectations impact our time commitments and ability to freely choose. We could reasonably ask of products or services: Can they free up our time for activities we might prefer over present activities? If not, then why not? When we don't take this kind of approach, we inadvertently allow "quality" product requirements to reduce the larger possibilities of our lives. Even worse, we allow those arbitrary product definitions to reverse a centuries long process, of the productivity gains which added so much to real wealth and societal progress.

As Diane Coyle notes in a recent Project Syndicate post, we could all benefit from a more nuanced understanding, as to what makes productivity relevant for our lives. She stresses how already in OECD countries, four out of every five dollars "purchases services or intangible goods". Coyle is spot on, in suggesting we need to think in broader terms about productivity measures and how they may affect overall well being. Otherwise, without a better approach to measured services output (and I suggest time arbitrage), it will only become more difficult, to determine whether societies can keep moving forward as before. Let's stop our struggles over how government demand among citizens is apportioned, and pay more attention to the supply side circumstance which matter most for everyone. Many of us have a good chance of thriving, if we can regain our former rights to select for size. Being able to do so, is what economic freedom is really about.

Have Monetary Foundations Lost Their Relevance?

Since the Great Recession, perceptions as to the importance of monetary policy, have changed considerably. But how stable is this new reality? Indeed, what happens not if, but when a new consensus is pushed too far? Harold James gives voice to some of these concerns in the concluding paragraphs of a recent Project Syndicate article:

The new narrative that has emerged is ideal for populists. It holds that the financial crisis discredited traditional economics, and that "neoliberialism" was a dangerous illusion. The neoliberal insight that came in for the greatest criticism after the crisis was that fiscal restraint is a virtue and rewards adherents with lower interest rates, cheaper credit, and enhanced consumer spending. According to the critics, government spending is not only free, but also an unalloyed good.

In this brave new economy, no one seems to be able to say authoritatively how much debt is dangerous. But that doesn't mean there isn't some level of debt that could trigger a dramatic reversal. If depositors and investors become nervous, debt could become expensive again, making the existing debt stock unsustainable. Only then will the populist magic stop working.

Those who want to restore conventional politics and the old rules find themselves in an unenviable position. Although they do not wish for an end to prosperity, they sound like they do when standing next to populists. Nobody wants to vote for Cassandra when Pollyanna is on the ballot. By the time Cassandra's warnings are borne out, it is always already too late.

His article was also an apt reminder, how important are some elements of what has come to be called neoliberalism, for continued prosperity and economic stability. I've long hoped that new forms of wealth might be built alongside existing wealth without excess disruption of earlier patterns. Now, however, I occasionally find myself wondering whether extensive wealth might instead be lost, before societies learn to create wealth via new and sustainable means.

Instead of disregarding the vital connections of monetary representation with prosperity, a broader understanding is needed for how monetary processes correlate with aggregate output and real economy conditions. Without sufficient focus on these quantitative aspects, central bankers sometimes protest that monetary policy can't be expected to accomplish everything. Which only leads to a further disregard of the quantitative nature of money, and what monetary policy can accomplish. Nevertheless, fiscal policy simply can't do the heavy lifting. Only real economy adjustments and accurate nominal representation will suffice for long term growth prospects and continued prosperity. It is becoming more important by the day, to explore how monetary connections relate to ongoing changes in aggregate output and real economy circumstance.

In all likelihood, I probably come across as one the Cassandras referenced in the above article. Alas, why continually remind people about accumulating debt burdens? Or the fact future wages can't rise to the extent enjoyed in an era of tradable sector dominance, with its ever expanding output? Or that traditional housing and infrastructure is beyond reach of many near future incomes?  Who wants to be told that important and useful services could be in jeopardy for millions, once governmental budgetary burdens get out of control?

Nevertheless, I emphasize these things because I believe they can be productively addressed in the long run - even if the short run mostly holds out hope of decentralized experimentation in new community. A few years earlier, I realized it felt important to stress some of what could be done, before going more fully into the whys of what happened in the first place. Hence the real "Cassandra" portion of my story, otherwise known as book two, became sandwiched between segments of potential responses. Once I complete the first portion of the book project (for the blog sidebar), which - not surprisingly - is a little behind schedule, I anticipate a return to concentrating on the whys of this economic dilemma. With a little luck I can get there before the end of this year.

Is Growth Necessary For a Successful Economy?

Is growth actually the best way to measure economic success? Dietrich Vollrath says it doesn't have to be so, and explains why in Fully Grown: Why a Stagnant Economy is a Sign of Success, which is due out in January. From the University of Chicago Press review:

Our powerful economy has already supplied so much of the necessary stuff of modern life, brought us so much comfort, security, and luxury that we have turned to new forms of production and consumption that increase our well being but do not contribute to growth in GDP. 

Tyler Cowen also highlights a text excerpt which gets into some of the specifics of Vollrath's argument:

Although there were plenty of changes in the individual markups firms charge, many of them actually fell over the last twenty years. What explained the overall rise in markups from 1.18 to 1.67 was that spending shifted away from firms with low markups and toward firms with high markups. Which high markup firms did we shift our spending to? Well, a lot of service firms, including those involved in communications, technology, health care, and education. In short, the rise in economic profits and markups we see at the aggregate level is part of the overall shift toward services we discussed a few chapters ago.

Here is where things get a little weirder. Baqaee and Farhi show that the shift toward high-markup firms was good for productivity growth. Whatever the source of a high markup, it indicates a product that is very valuable relative to its marginal cost. If we take the inputs required to produce a low-markup product and use them to instead produce a high-markup product, then we have raised the value of what we produce. As this increase in value came from reallocating our existing inputs toward a different use, rather than from accumulating new physical or human capital, the shift in spending toward high-markup firms shows up as an increase in productivity growth.

Nevertheless, we still need to consider the fact additional growth remains desirable at a global level. For that matter, nations with advanced economies continue to seek local growth, particularly since many citizens and communities lack full participation in a 21st century knowledge based economy. Only consider these realities in utilitarian terms. Have we already created the greatest good for the greatest number, before making luxury the default option for economic goal setting?

If citizen and community majorities were already engaging with sustainable infrastructure; assets and services in the form of luxury product would be aggregate gains. But there's a problem. We still have insufficient market capacity for simpler and more basic forms of non discretionary options. Meanwhile, citizens and communities continue to add on debt to sustain luxury versions of infrastructure and services which are actually out of their reach. In other words, the market has yet to create the greatest good for the greatest number at basic levels of need, as opposed to the wants of discretionary choice. Yet no institutions - at least to my knowledge - are yet addressing this supply side reality directly. Which could help explain why some policy makers are likely to continue seeking higher growth levels in aggregate, whether or not economists believe it necessary to do so.

As to Vollrath's arguments, if sufficient basic non discretionary options were in fact available for low income levels, his conclusion might be essentially correct. Today's low growth economy would be reasonable, if citizens and communities were already proceeding from a financially sustainable base - one that doesn't need a growing revenue stream so as to pay down debt. However, there are problems with luxury consumption when it cancels out basic infrastructure, asset and service formation for low income levels, especially during times of great income variance such as the present. And today's non tradable sector institutions lack the incentives to ensure that lower income levels gain basic economic options by which they could live relatively normal lives.

Again, luxury consumption as a broader component of GDP is likely positive, so long as more basic forms of consumption are not suppressed. When they are, as is currently the case, societies take on additional budgetary burdens which are not easy to resolve, long term. Even though lower income levels have benefited from the real wage gains of additional output in recent centuries, much of their real wage gains are a direct result of the good deflation of countless forms of tradable sector product. Let's not forget the benefits of good deflation, and its role in economic stability over time. We still need good deflation as a contributor to many local settings and communities, so these citizens can hope to lead productive lives well into the future. More output with less cost is central to economic prosperity. Good deflation is the best way to address the extreme income variance in society which will doubtless continue.

New creation of non tradable sector good deflation is imperative, given our historical moment of relative wage stagnation which leaves supply side means as the main recourse to improve the real wage capacity of lower income levels. Only recall as well that a predominance of luxury options in product which does not scale, reduces market capacity in areas which do scale. The resulting imbalance bears considerable responsibility for wage flattening, since service sector activity generates less output in relation to tradable sector output.

In short, more good deflation is needed in areas which remain exclusively devoted to luxury. Let's create valid supply side options to ensure that those with small wages can live normal and productive lives. Should we elect to do so, policy makers might not view higher monetary GDP levels or excessive fiscal policies as the sole options for economic gains in the near future.

Musings on Food Deserts, Company Stores, and More

Where retail is concerned, often cities and communities may appear to have either too many or too few local options. What makes it so difficult to coordinate supply and demand that everyone can be happy with? In particular, the U.S. supposedly has too much retail, hence the ongoing death of numerous apparently unneeded malls. But what if the real problem isn't actually too much retail?  Chances are, much comes down to how proprietors are expected to offer their goods. Perhaps the bigger issue is retail offerings in communities lacking sufficient density (during working hours especially) for extensive infrastructure investment. Why do cities and towns make such investments necessary anyway? Especially since we're only human, and consumer tastes can change before brick and mortar stores outlive their intrinsic usefulness.

Many a community has questionable "build it and they will come" examples. Some of these enterprises even manage to remain open despite mostly empty parking lots, as potential customers continue to drive where more shopping amenities can be readily found in one place. Some of the biggest business risks in fixed locations with traditional overhead costs, are for perishable commodities. Often, the only way to stay profitable is to eliminate perishable inventory altogether.

Of course, following this limited waste rule to maintain profits and stay in business, has plenty of detractors in the media. By way of example, one hears complaints about "food deserts", especially when the "wrong stores" come to town, such as Dollar Generals which are reputed to prevent regular grocery stores from opening in the same vicinity.

There's a Dollar General in close walking distance from where I live, yet the fact it sits adjacent to the local grocery isn't unusual. I made my peace with the fact Dollar General couldn't make special orders, several years ago. The fact they don't, probably helps to explain how they can stay open in towns with a limited customer base. I'm just glad for the merchandise they do carry, which saves so many trips out of my small hometown. Meanwhile, the local grocery does its level best to stock as much fresh produce as possible, in spite of the fact many potential customers make the drive elsewhere to larger towns. It's discouraging to think how much fresh produce must go to waste! As a former business owner, I remember all too well, wanting to carry more perishables than could realistically be sold locally. If only the individuals who complain about Dollar Generals and food deserts could know what is actually at stake.

What about produce markets and flea markets for fresh products? For a long time this was a viable option for self employment. Decades earlier, one could find flea markets wherever they happened to travel. Indeed I would have gone back to flea market selling were it possible, once rising rents got to a point brick and mortar locations were finally out of reach. Some of what is involved for the future financial security of millions, is simply overcoming the lifestyle illusion which tries to mandate everyone living as though they can afford a standard middle class lifestyle.

One historical consumer complaint could hardly seem more different than food deserts: Mandated local shopping! Many of us of a certain age recall Tennessee Ford singing "Saint Peter don't you call me cause I can't go. I owe my soul to the company store." The company towns of a century or so earlier, often ruled over their citizens like small authoritarian governments. At the very least, these were small decentralized versions of authoritarianism not overly difficult to exit. Many a restless or otherwise "fed up" local could vote with their feet to leave, and frequently did. The ones who willingly stayed, were often happy with the local abundance of the company store.

Nameless Towns is a historical sketch of Texas sawmill communities as company towns, from 1880 to 1942. I really enjoyed this book, in part because it took me back in time to places my family came from. Two grandparents lived and worked in Nacogdoches, near the edge of what was once a vast and ancient longleaf pine forest. Company towns finally cut down the last of these majestic trees in the early forties and then disbanded. Another of my grandparents worked as a sharecropper in these thinly settled regions, and I have little doubt he would have been too independent minded for the hierarchical demands of company towns! Although that likely didn't stop him from selling a little moonshine (along with fresh garden produce) to their inhabitants from time to time, even during Prohibition.

What determined the extent of company operations in these deep woods? Thad Sitton and James Conrad explain:

The number and importance of private businesses in company sawmill towns seem quite variable, and this matter probably relates to critical decisions companies made at the origins of their towns. Very occasionally, companies like Lufkin-Land (later Long-Bell), Angelina County Lumber, and Thompson-Tucker chose to set up operations immediately adjacent to major market towns, such as Lufkin and Trinity. In these cases, private businesses lay just beyond the sawmill-town perimeters from the beginning, and there was nothing the companies could do about them except offer full-service towns, including commissaries, drugstores, schools, and boardinghouses, and pay only in merchandise checks. However, the merchandise check and company social pressure to trade at the commissary often did a remarkable job of keeping employees on the reservation, especially in the early days. Around 1910, for example, a Lufkin resident recalled that downtown merchants in the county-seat town catered mainly to the cotton-farming trade despite the presence of two 100,000-board-feet-a-day mill operations immediately adjacent to the municipality. Company economic policies effectively insulated workers from the nearby "cotton town". 

Much more commonly, however, companies bought land and set up new towns in the remote countryside close to their timber holdings, and in this case they had the option of keeping all land in company ownership and leasing it out to private businesses on a case-by-case basis, or of selling off big blocks of property in their towns to whomever paid the price. 

By the time the petroleum company town of my youth set up camp for its resident workers, the work of logging company towns was almost done. Newer versions of company towns, once many families purchased automobiles and traveled more widely, were certainly far less hierarchical. For instance my mother recalled that while engineers did live in a separate row of houses, they were built the same as any other camp houses. There was one commonality with the earlier company towns, however. These neighbors still spent their days socializing with one another, and like the children of the sawmill towns, children in the latter version had the same freedom as well, to roam about the entire neighborhood as they desired.

Once most families gained access to reliable transportation, company towns and their associated stores became a thing of the past. Initially in the fifties and sixties, local Main Street retail was prosperous in towns of all sizes. But by the time families were able to purchase two vehicles, consequently working too far from home to shop locally during the day, these Main Streets began to decline. In a sense, Main Street became the first retail deserts of our time. What might we expect in the near future, as the process reverses and families own fewer vehicles, in particular outside today's prosperous regions? How far in a different direction, might small communities go from the well to do cities of the present? Right now it is anyone's guess.

The Cost of the Conduits is Too High!

One might easily imagine the dispersal of knowledge through society as freely flowing through conduits - much as pipes for electrical wiring or channels for water. But how effective are flows of knowledge today, since knowledge protection via rival use means diverting channels to pay the bills? What happens, if conduits for knowledge dispersal in society become so limited, that citizen participation essentially dries up like a river which no longer meets the ocean? Already, we observe where limits to productive agglomeration in prosperous regions are cutting off other avenues for getting things done - not just in the U.S. but across the globe.

That said, by no means are today's knowledge conduits the only ones faced with excessively high costs. Main Streets in general have similar requirements for getting things done. Unfortunately, when the sought after "show horse" versions of retail landscapes don't function as planned, full scale working horse versions aren't often permitted in their stead. Johnny of the blog Granola Shotgun, describes the "working horse" model and how simple it could be to implement, if only it were feasible to do so. He recently visited a flea market which was

composed of an old asphalt parking lot, tents, and portable shipping containers. There isn't anything about the place that costs much to build or maintain yet it functions like a traditional human scaled Main Street with mom and pop shops. 

This was no "fashionable" flea market, either. Rather, it contained essentials and much more:

Quite a few vendors were selling tools suitable for small scale businesses. Landscaping equipment, carpentry implements, compressors, and restaurant supplies could be purchased by people looking to start their own micro enterprise on a tight budget - possibly right there at the same flea market. The whole place was one giant interactive incubator. 

There were plenty of tasty meals to choose from and even inflatable slides for the children. He continues:

This place is a work horse. It grows small businesses from scratch without recourse to bank loans or government subsidies. It provides products and experiences that are genuinely needed in the community. And it costs almost nothing to create compared to the usual economic development model meant to induce artificial prosperity through tax holidays and subsidies for mega projects. Notice how any parking lot is instantly ADA compliant for people in wheelchairs who require a barrier free environment. This is amazingly good urbanism built in the absence of complex bureaucratic proceedings. 

So why don't local governments embrace more of this sort of pop up grass roots mom and pop enterprise? Officials are in a trap that requires them to boost the tax revenue to pay for all the attenuated infrastructure and municipal overhead that's accumulated for decades.  

Alas, municipalities are caught in the same show horse mindset for time based high skill services. Granted, there are vast troves of information and retail possibilities in the digital realm for individuals to access, especially when Main Streets are missing in action. But these economic options don't even come close to replacing the economic dynamism and person to person interaction that were once taken for granted at local levels. Apparently these timeless versions of free market activity could only be recreated by citizens who inexplicably now need exclusive permission, not only to take part in simple physical retail, but also today's knowledge centered economy.

To be sure, some overhead costs have evolved as ways to minimize "riff raff" and security risks. But the perceived need to keep up appearances has completely backfired for countless communities and millions of individuals who wish to take part in local business and service opportunities. More flexible building and infrastructure components, and permissions for knowledge use are needed. Chances are the new landscapes for retail and services wouldn't often resemble the flea markets of yesterday, but they still need to be equally simple to assemble.

Affordable components and permissions for living and working, would mean millions more can get back up and start over, even after they've assumed risks which proved too extensive. Who doesn't want to appear successful, especially since appearances have been legally required in most environs? Hence it's somewhat understandable that business people take excessive risks for the success signal, up to a point. Yet just the same, many individuals with successful flea market operations ended up making the leap to brick and mortar locations, then had no thriving flea market to return to, afterward.

What is not understandable, is the lack of economic options with safety valves that cushion the hard landing of individuals who unsuccessfully assume risk. Without those safety valves, individuals exit only reluctantly after many attempts to stay connected, and their lives can be irretrievably lost to solitude in the process. We need a new version of opportunity zone, one which makes far fewer exits necessary. Opportunity zones could create flexible permissions and incremental ownership options for those who are directly invested, not just outside investors who are expected to maintain the high cost status quo. It should not always have to cost so much to participate in economic life. People should not have to give up on vital connections years or decades ahead of schedule. All the more so, since demographics have shifted in ways which include needing to remain employed as long as possible.

Does Real Estate Contribute to Baumol's Disease?

Is real estate a source of Baumol's disease? Like the chicken and the egg, it's difficult to tease out which comes first - local income averages or local real estate cost averages. And regardless of productivity (or lack thereof) in relation to income, people from all walks of life often need to come together to get things done. Hence income smoothing for social and economic coordination - all the more so at local levels. Still, there are additional burdens from the Baumol effect which dramatically affect overhead costs for a wide range of activity. This in turn can ultimately impact the dynamism of both tradable and non tradable sectors.

Tradable sectors have long employed whatever means they could dream up, to escape the burdensome nature of real estate overhead. Non tradable sectors don't often take this route, and since their product tends to be linked to time and place, they also lack incentive to do so. But why? For one, they tend to conceptualize real estate "exclusivity" as a signal of quality product. Of course this form of quality product carries additional costs for everyone, since much of it is non discretionary. The more impressive and "solid" each building where time based services are provided, the greater the problem for total factor productivity in general.

Real estate expectations such as these can lead to disequilibrium, once non tradable sectors dominate tradable sectors. In this historical instance, non tradable sector dominance is placing too much money in a passive position with limited potential for investment. Plus: Currently, all economic activity is designated solely as money. One issue is that when money represents all formal activity, aggregate revenue ultimately flows to real estate. Alas, non tradable sector dominance can hasten the process. For instance, we currently see it playing out as landlords "capturing the wealth" of prosperous regions. Once a certain amount of real estate becomes associated with services consumption instead of tradable sector production, substantial monetary flows get "parked" on the sidelines.

Nevertheless: The main problem for Baumol's disease in relation to real estate, is that governments won't be able to maintain adequate taxpayer revenue much longer, since the cost signal for quality product is repeated over and over throughout the entire applied knowledge (supply side) chain. Unfortunately, quality signal costs are borne by all individuals and institutions. More than anything, this is precisely what stands in the way of sustainability for applied knowledge in the 21st century.

One way to address the problem is a new approach to ownership - one which not only promotes greater flexibility and incremental options for citizens, but places less emphasis on real estate as a quality signal for time based product. Plus, by making time value a viable economic unit in its own right, less economic value would flow to real estate as a final resting place. Alongside the flows which money creates in real estate, would be a time flow continuum which culminates in greater use of applied knowledge and skill, and greater economic participation by all concerned.

To sum up: Once service sectors begin to dominate, they generate a different macroeconomic reality than what exists during tradable sector dominance. Still, should systems be negatively impacted (making them appear as though "full"), time value could prove a vital economic unit for additional wealth creation, alongside money. Otherwise, too much human potential can end up parked on the sidelines or on the other side of borders. Economic time value could capture knowledge and skills in ways which make them a constant component of economic dynamism. It could help reduce the Baumol effect, and the problem of landlords passively capturing the sum total of wealth value. Indeed: Perhaps Baumol's disease really is linked with what have become unnecessary real estate costs.

What Really Preserves the Labour Theory of Value?

Who still believes in the labour theory of value, rather than the more recent subjective version? Or, perhaps there's actually a more relevant consideration: How much personal belief in a labour theory of value manifests unconsciously, instead of at an ideological level? Chances are, unconscious attributions for labour value are a stronger contributor to economic outcomes than what is often debated. One might envision the general equilibrium result as power relationships in skills arbitrage, for that matter.

Indeed, underlying assumptions regarding labour value, greatly affect how high skill human capital has been conceptualized, especially since the workplace transitions of the twentieth century. Professional groups often rely on a non tradable sector structural framework which allows human capital inputs to take precedence over the aggregate outputs of time based product.

In this instance, it turns out that subjectivity cuts both ways. Consider how a subjective theory of value in terms of product, previously benefited from direct correlation with good deflation and recognizable gains in standards of living. It made sense to emphasize the subjective reality of product value regardless of labour contribution, when progress could be largely attributed to tradable sector productivity gains. But more recently, subjectivity has become associated with societal expectations as to what quality product represents. The consequent emphasis away from baseline utility, has muddied the waters for product subjectivity, especially for potential labour value contributions. Alas, quality time based product often includes excessive inputs at multiple institutional stages, before the product output intended for consumers actually takes place.

While my impressions re subjectivity dovetail somewhat with those of the Austrian school, many such discussions feel more relevant for historical periods of tradable sector dominace. Madson Pirie reflects on Carl Menger's many contributions to subjective value, and notes:

He founded what is now called the Austrian school. His crucial insight was to recognize that price is not based on what it costs to produce goods, as traditional economists had supposed, giving rise to the labour theory of value on which the edifice of Marxism is built, but on what the demand is for them.

He adds:

...value does not reside in the object, deriving from its input, but resides instead in the mind of the observer, representing his or her estimation of its worth. 

Even if arbitrary definitions for quality standards reduced the impact of good deflation for tradable product, at the very least many forms of tradable sector product provide standard utility which can be readily discerned. Alas this hasn't proven the case in non tradable sectors, where a reasonable baseline for product utility has long been abandoned in favor of requirements which - among other things - have muddied the waters of true productivity gains.

Given the subjectivity of economic outcomes, a better utility baseline is needed for non tradable sector product in general. A better definition of basic non tradable sector utility - especially for housing and time based product options - could clear some of the present fog as to how aggregate productivity, hence potential economic gains, might once again be measured with confidence.

Artificial Intelligence as a "Road to Serfdom"?

Even if so, AI would only be one of many factors which could exacerbate further losses of freedom in the years ahead. In particular, AI should not be scapegoated for the kinds of equilibrium defining actions which humans have been responsible for, all along. What's really at stake, is how individual actors and associations choose to implement artificial intelligence in markets and workplaces. Might its use become mostly limited to the augmentation of professional functions, for instance? Why haven't we thought more about the right to actively participate in applied knowledge, as a valid component of economic and personal freedom?

With complex issues such as these, it helps to recall how supply side considerations also impact economic outcomes - especially for the high skill time based product of service sectors. Given the fact non tradable sector activity has become largely responsible for the dynamism of advanced economies, how might existing opportunities for scale be encouraged? When basic aspects of domestic aggregate output are purposely limited, demand deficiency results. And unfortunately, these general equilibrium conditions don't readily respond to either fiscal or monetary stimulus, when basic supply side factors create most of the existing imbalance.

Today's best opportunities for scale, lie in the greater inclusion of all individuals in economic participation. How so? Our dominant sectors are heavily linked to time and place. Once assets or services are specifically time and place related, the greatest potential for gains in scale is in terms of aggregate participation. This reality is radically different from centuries of tradable sector dominance, in which gains in scale (and progress) were determined by a growing output trajectory which gradually required fewer labour inputs over time.

Plus, no society can remain free, should too many citizens find themselves excluded from the most basic forms of domestic economic activity with connections to time and place. In an article for Project Syndicate, Robert Skidelsky wonders whether AI might contribute to a "road to serfdom", in part because of the slowdown in wage growth:

Studies around the world show that people want secure jobs. At the same time, they have always dreamed of a life free of toil. The rise of the robots has made the tension between these impulses palpable.

Skidelsky also emphasized the fact that technology has in fact been able to bolster wage capacity for a long time. What I believe has not been highlighted enough, is the fact that non tradable sector dominance has proven responsible for much of the present wage conundrum. Yet while technology has already provided millions with workplaces essentially free of physical toil, AI is beginning to enter territory which is increasingly unappealing to professionals. After all, deep learning processes enable AI to supplant some aspects of work which are part of intellectual challenge. Most high skill work has always been free of toil in a "beast of burden" sense.

This is why the high skill work of the present, needs to be recognized for the intellectual challenge rewards it can actually provide, for anyone fortunate enough to take part. Most important, is that much of this is work people would actually be willing to perform even without pay, if the circumstances of their lives allowed them to do so. Just the same, the costs of living in our most prosperous regions not only require one to do desirable work for pay, it needs to be substantial pay to live in these settings as well. Consequently, we still have high hopes which - alas - won't be met, to somehow gain higher incomes and stable jobs for everyone who tries hard enough to obtain them.

Fortunately, good economic options are on the horizon. However, there's still plenty of social turmoil to get through before those options start to become more obvious. And the biggest hurdle which has led to so many dashed hopes, is the myriad of ways society has defined what success supposedly looks like. Presently, we are being ground under by a massive accumulation of societal expectations - even though many of them are little more than lifestyle illusions.

Once we recognize the possibilities of innovating the domestic parts of our economy - that is, the ones which so often manage to make our incomes appear too small, we can begin to redefine the non tradable sector equilibrium conditions which have made the maintenance of our present lifestyles so fragile. AI can help us in this challenge, by radically reducing today's human capital investment costs. Instead of struggling to bring income capacity closer to supposed general equilibrium "necessities", it makes more sense to allow non tradable sector equilibrium dynamics to reflect a wide range of local wage capacity. Eventually, variations on defined local equilibrium, could also give citizens the ability to ensure that AI improves the prospects of all human capital.

Productivity Gain as Conceptual Organization

Imagine for a moment, that all firms and organizations might somehow realize gains in productivity, by reducing labour in relation to capital (in aggregate) while increasing output. For that matter, most productivity potential, with its associated expectations for gains in standards of living, continues to be thought of on these terms.

Clearly, the marketplace doesn't necessarily follow the above described pattern, especially where quality product is concerned. In particular: Until recently, non tradable sectors have been relatively free to up the ante on quality product requirements, due to the centuries long growing revenue of tradable sector output gains. However, once non tradable activity began to dominate tradable sector activity, its relative lack of ability to scale meant less growth in aggregate output, which ultimately contributed to substantial adjustments in monetary policy as well. The growth of non tradable sector activity as a component of GDP, especially in time based product, was also due to broad government support and extensive financial networks. One could say that private industry's desire for quality product requirements, mostly received the blessing of public institutions, in spite of the burdens that created for the latter.

Of course it wasn't always this way. Centuries earlier, tradable sector dynamism and global output grew, as artisan quality product was transformed into mass production. Oddly, we've yet to come to terms with the reality of artisanal non tradable sector product requirements as an actual regression in standards of living. Small wonder, because it can be easy to confuse the financial obligations of quality living environments with gains in standards of living. What, exactly, does ownership of a nice home require in terms of personal commitment for the full extent of one's working years, for example? Yet relative time commitment requirements are one of the best means we have, to decipher true gains in standards of living and total factor productivity. Today's non tradable sector requirements also explain why Keynes never realized his vision of a world in which future generations would no longer need to work full time.

Much societal progress is a result of those earlier tradable sector output gains. Today's total factor productivity will remain compromised, until innovation is finally allowed to do its magic on the ways in which our non tradable sectors are constructed. For one, service sector activity isn't so much about reducing labour in relation to physical capital and aggregate output, as output gains which include a greater measure of total human capital potential. Many non tradable sector production processes need further clarifying, especially insofar as how quality expectations affect supply side realities.

Again, once service sectors started to dominate economic activity in developed nations, markets emerged as a considerable portion of GDP, which were not readily amenable to gains in scale. Since the Great Recession, the Fed never completely recovered the previous growth trajectory level which had essentially been maintained for well over a century in the U.S.  If total factor productivity is to be restored to a more dynamic level, the general revenue demands of present day non tradable sector activity will need to become better managed. Not only do more direct forms of growth need to emerge in non tradable sector activity, this growth needs to be permitted to an extent that tradable sector activity can once again contribute to higher growth levels as well.

Periods of service sector dominance call for more direct means of conceptual organizational capacity, than what are presently being observed. The economic option of labour symmetry - or time arbitrage - could provide a path toward greater productivity which no longer detracts from existing general equilibrium revenue. Presently, some aspects of total factor productivity are being compromised by limited sets of human capital demands on total revenue. These existing demands have only become more evident, as service sectors comprise as much as 80% of GDP in developed nations.

Perhaps a reasonable limit for asymmetric services sector patterns would be in the range of 50% of GDP, so that general revenue balance could be restored between all sectors. By no means would such an adjustment suggest that service sector growth be diminished - only that more service sector activity would occur on symmetric or immediate wealth creation terms. By allowing more supply side in services product, more discretionary income would once again be able to flow towards the dynamism of tradable sector activity.

One advantage of such an approach, is that a growing percentage of non tradable sector activity could function with a similar production norm of good deflation, such as what naturally occurs in tradable sector activity. Greater balance between tradable and non tradable sector activity, might also allow monetary policy to return to normalcy. After all, central bankers would no longer be as compelled to keep extensive amounts of human capital sourced income, out of the active circulation of general revenue.

A significant amount of today's income representation is also parked in assets which can't fully contribute to economic dynamism. Yet GDP is representative of our economic journey, not a supposed destination. Let's ensure that more individuals take active part in our economic journeys, instead of having to watch from the sidelines. It's possible to tap human capital in ways which could capture its full potential. We can make excellent use of far more, than what only the best and the brightest have to contribute.

Nirvana Fallacies and the "Enemy of the Good"

As NIMBY preferences make inclusive communities less likely, nirvana fallacies also lessen the chances of new productive agglomeration, due to "one size fits all" infrastructure requirements. Stated another way: not only is it difficult to make room for more of us in the productive agglomeration we already have. It is costly and cumbersome, to establish new settings where additional productive agglomeration could occur.

Among other problems, nirvana fallacies don't consider the decades old reality of wage stagnation. Yet how much stagnation was truly necessary? Non tradable sector production reform, would have meant substantial real wage gains for all concerned. What's more, many aspects of production reform, should not have to be complicated - especially those which make it simpler for individuals to coordinate their lives in closer proximity to one another.

With production reform, millions would be able to embrace simple transportation options that could be designed for local community levels. Meanwhile, too much transportation dialogue centers around "perfect solutions" such as autonomous vehicles. Such a reality might also be imposed on communities which don't particularly want them. Worse, it might become difficult to build new, wage responsive communities, should all regions be expected to bear the infrastructure costs of autonomous transportation as the "perfect" solution.

Why are non tradable sectors so reluctant, to respond to the shifting wage distributions and lifestyle preferences of the present? Had these sectors been open to technological innovation all along, worries about wage stagnation would never have been necessary. Proactive measures would have resulted in real wage gains, which reduced the need for government revenue at the same time. Of the nirvana fallacy, Wikipedia wrote:

The nirvana fallacy is the informal fallacy of comparing actual things with unrealistic idealized alternatives...It can also refer to the tendency to assume that there is a perfect solution to a particular problem...By creating a false dichotomy that presents one option which is obviously advantageous - which at the same time being completely implausible - a person using the nirvana fallacy can attack any opposing idea because it is imperfect.

Doesn't the reality of real wage losses, especially given the consequent effects on city budgets, deserve a more practical approach? Nevertheless, cities become flummoxed when citizens take matters into their own hands. For example, Toronto residents had already experienced mishaps on a steep trail in a community park, before a citizen went ahead and built a $550 stairway. Since a stairway which met city standards would cost approximately $65,000, the privately provided stairway may be torn down.

In this instance, the city should have little difficulty funding a stairway built to bureaucracy code. But what happens when existing regulations make it difficult for populations whose income levels are better suited for less costly options? Also consider how Wikipedia describes perfect, as the enemy of the good:

A widely accepted interpretation of "The perfect is the enemy of the good" is that one might never complete a task if one has decided not to stop until it is perfect. Completing the project well is made impossible by striving to complete it perfectly. Closely related is the nirvana fallacy, in which people never even begin an important task because they feel reaching perfection is too hard.

Non tradable sectors are particularly exposed to both of these problems. While the human capital investment requirements for time based services of healthcare and education are affected by the "enemy of the good", physical infrastructure suffers from the nirvana fallacy. The "perfect as the enemy of the good" has also become a problem, for matching potential between employees and employers. When jobs dialogue is caught in the polarization of employee obligations versus employee costs, much of the underlying rationale for high reservation wage requirements - on the part of the potential employee - is missed. To what degree does the nirvana fallacy in present day infrastructure, contribute to one's personal high reservation wage?

The one size fits all "perfect" solutions of many a rule and regulation, leave little room for the incremental growth and ownership that would strengthen the hand of those with limited income. I have suggested time arbitrage as a form of incremental growth, which could make good use of skills as they are being developed.

Likewise, incremental ownership would be possible in time arbitrage settings, through the flexible arrangements of building components which can be reconfigured as lifestyle needs change. No one's "perfect" dream would have to be shattered, every time a personal commitment or investment doesn't work according to plan. At the very least, we can make room for flexibility at the margins, where millions await their own chance for full economic participation and productive lives.

Labour Abundance is Impacting Middle Class Dynamics

Even though the reality of labour abundance has been noted in recent years, this problem has yet to be productively addressed. For the most part, full time employees are doing well, with sufficient salaries for both basic needs and discretionary consumption. However, employees working on contract - especially in firms that are subsidiary to core activity - sometimes lack the salaries to purchase basic needs on today's non tradable sector terms.

The growing use of contract labour in the 21st century, with its associated lack of benefits or job certainty, is one of the more prominent examples of labour abundance. While one can point to earlier examples of labour abundance, some societal developments (at least in the U.S.) are becoming more obvious as unemployment related, in retrospect. Until recently, unemployment was closely associated with one's personal shortcomings - whether perceived or real. Indeed, the correlation of many societal burdens with a declining labour force participation rate, is one of the few economic associations that is obvious.

And the U.S. in particular, benefited from relatively low unemployment statistics for decades, in part due to the ramped up use of imprisonment. Another institutional response has been disability assistance, which individuals with health issues sometimes turn to, after a protracted struggle to maintain steady employment. More recently, zoning restrictions and the costs of scarce productive agglomeration, have contributed to both reduced internal migration and long term unemployment. Excessive labour abundance can also be traced to homelessness, drug overdose deaths, and the black markets which include slave and sex trafficking. Often, the latter is perpetuated through dubious enticements, for what the victims believe to be legitimate jobs.

In "The Wealth of Humans", Ryan Avent stressed the fact that labour abundance would continue impacting middle class dynamics, well into the foreseeable future. He noted that while formal education was once an appropriate response to labour abundance (when people left the farms for the cities), education could no longer be expected to to work the same magic, in the 21st century. Even if everyone "miraculously" gained a college degree, today's institutions would not be able to hire everyone, on the same middle class income terms.

Nevertheless, policy discussions have yet to truly focus on Avent's warnings. Instead, policy makers tend to double down on the earlier recommendations of "more education" and additional income support. Alas, in his book, Avent explained how responses such as these were insufficient for the present.

Fortunately, there are strategies to counter labour abundance, which could prove more productive than preparing ever more skills for the institutions which presently need less of our skills, in aggregate. Education in particular, needs a strong reorientation. Educational input, as human capital investment, could become part of an institutional process which measures both input and output for mutually desired time based services. Both local infrastructure and building components need extensive improvements in the decades ahead. This last measure is especially important, if citizens are to regain their confidence in the capacity of their own income potential.

Granted, it's not easy to focus on the need for institutional adjustment and structural reform. But labour abundance needs to become a positive in the marketplace, so that already existing skills sets and investments will not be lost. It's important to face up to the reality of labour abundance, before the labour force participation rate trends even further downward. As Avent emphasized in "The Wealth of Humans, history is not always kind, when labour is abundant. It's time to put our present day abundance to good use.

Middle Class is a State of (Organized) Mind

What are the real concerns about a "missing" middle class, given increased levels of income divergence? Once, a middle class designation seemed simple enough. Only recall the fortuitous circumstance of mid 20th century employment in the U.S., when factory workers without college degrees could still raise families and purchase homes. The loss of this temporary "norm", continues to cause more consternation than should have actually been the case. After all, our environments for living and working, could have included options which lend dignity to people of a wide range of income levels!

Instead, middle class roles have morphed into "requirements" for two college degrees, along with two incomes to raise a family. Alas: what has occurred, which makes the present day economy so different from sixty years earlier?

It helps to consider factors not associated with income level; but instead, expectations for "one size fits all" production, consumption and mandatory infrastructure requirements. Whereas primary market institutions deal with these realities via internal organization for costs, secondary markets adjust costs according to revenue availability, in a constantly shifting general equilibrium. Unfortunately: over time, changing conditions also make the latter approach more difficult to coordinate for either time based product or asset formation. How to maintain both personal responsibility and economic viability?

Being middle class is not so much about income, as a state of mind. It's how society organizes for activities deemed important and desirable. The monetary costs of doing so, are reflected in the environments which make it happen. Middle class problems are less about any specific income amounts, and more about the increased difficulty of meeting crucial obligations on society's expected sets of terms.

Part of the problem in this regard, is that far more redistribution now takes place via income which is already a result of previous redistribution in varying amounts. 20th century taxes - many of which resulted from primary market wealth and output - were a simple proposition by comparison, hence tended to have more definable fiscal outcomes. Today, when taxation is added to already existing levels, outcomes for new fiscal obligations are already in doubt.

Higher costs for time value in secondary markets as compared to primary markets, also contribute to greater local asset costs. The Baumol effect is a form of mutual "entrapment", which in turn reduces discretionary income for all concerned. Among the many reasons this situation matters: it could play havoc with basic income experiments in today's complex economies. By comparison, basic income for environments which have fewer production/consumption restraints, may hold more potential for positive outcomes.

Indeed, a recent experiment for basic income in extreme poverty circumstance, appears to be going well. There's good reason why discretionary income improves environments which don't have an exceedingly high bar to participate in the workplace and marketplace. Much of the money these villagers received - once they purchased food - was able to pay for amenities capable of contributing to their long term betterment. Whereas basic living costs in today's developed nations, leave little "small wage" room for long term investments and related discretionary spending. Anyone who relies on limited income in a complex economy - basic income or otherwise - needs environments structured to provide dignity for what these individuals are capable of contributing.

Societies inadvertently jeopardize their own middle classes, by continually raising the bar for participation. Once this process reaches a certain point, basic income may also be out of the question, as a suitable long term response. Economic, social and political freedoms can be lost, if and when economic access is restricted for too long.

Why is Innovation "Not Enough"?

Dani Rodrik has a Project Syndicate post, "Innovation is Not Enough", which in some respects is spot on:

...who can seriously doubt that innovation is progressing rapidly? The debate is whether these innovations will remain bottled up in a few tech-intensive sectors that employ the highest-skilled professionals and account for a relatively small share of GDP, or spread to the bulk of the economy. The consequences of any innovation for productivity, employment and equity ultimately depend on how quickly it diffuses through labor and product markets. 

Technological diffusion can be constrained on both the demand and supply sides of the economy. Take the demand side. In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing and retail goods. Technological innovation has had comparatively little impact in many of these sectors.  

...The two sectors in the United States that have experienced the most rapid productivity growth since 2005 are the ICT (information and communications technology) and media industries, with a combined GDP share of less than 10%. By contrast, government services and health care, which together produce more than a quarter of GDP, have had virtually no productivity growth.

...On the supply side, the key question is whether the innovating sector has access to the capital and skills it needs to expand rapidly and continuously. 

Consider also, how the primary investment of recent decades has occurred. Where once the most important forms of saving were designated for capital other than time value, knowledge use - especially the value of which accrues to non tradable sectors - has gradually become the more dominant form of wealth. Where land value was once closely aligned with the value of basic food commodities, real estate now more closely responds to the nominal income representative of time value, and the spontaneous coordination of prosperous regions.

Human capital representation on economic terms is only partial, despite the fact investment priorities for time value begin early in life. Even public education attempts to determine what might augment human capital investment, before other forms of capital savings come into play. Thus far, however, only a fraction of time investment expenditure shows up as wealth gains - given today's partial representation of time value at an economic level. Consequently, additional savings for capital contribution (in the classic sense), are mostly limited to those who benefited from initial time value investment, as represented in general equilibrium.

Even though human capital is key to potential productivity, there's good reason why (what appears as) non productive sectors have yet to experience the broader gains of innovation. One reason these sectors seem non productive, is that technological gains have mostly generated wealth capture for greater administrative capacity.

Worse, the value of human capital (in aggregate) as a economic component, is at odds with a natural inclination for societal exclusion, which governments and private interests alike are able to tap for wealth capture. It is the struggle for economic access, and the many forms of signalling required to gain access, which pushes up the price of markets in ways that make costs of living higher for everyone. The time and knowledge based services of healthcare and education, are especially prone to these forces. Indeed, the natural tendency to judge can prevent the organizational capacity, which would otherwise result in product that generates good deflation and a freer, more open marketplace.

Oddly enough, perhaps the innovation most needed, is for the human mind to be willing to tap the potential of human capital - much as other resources have also been utilized in their turn. Granted, this is not something that either can or should be expected of every environment, given what have become vast differences in human capacity and lifestyle choice. Rather, human capital potential could be tapped in settings which acknowledge the importance of developing useful marketplace patterns along a continuum of income potential. This, as a viable alternative to today's default settings of relative rich or poor as the sole options.

Lifestyle Illusion is Stagnation's Best Friend

Why so? Often, it comes down to how we believe we're supposed to live and act, which stands in the way of innovation's greatest potential. Even though I've not often defined "lifestyle illusion" specifically, it deserves inclusion as an eventual glossary term. As a blogger, I remain convinced that today's economic stagnation is almost entirely due to cultural and social perspectives. It's not particularly problematic for everyone to live and work in resource intensive construction and rely on specialized professionals for most important knowledge use needs, so long as economies are strong and growing. But when economies falter, it's time to reconsider, what are beginning to become luxuries in that regard.

Essentially, lifestyle illusion stands in the way of productive capacity, which would otherwise extend marketplace formation and benefit millions. Instead of real innovation, most of what is now suggested in its place, adds additional options for higher income levels. Even though more product differentiation may result, little of it has proven capable of expanding economic access or greater economic viability.

There's another important aspect of meaningful innovation as well. A mature economic equilibrium requires a sufficient response to take place on multiple dimensions, i.e. a series of interlinking networks. Unfortunately, meaningful innovation is no longer the matter of a single response to existing circumstance, but the ability to generate new sets of conditions that work in concert with each other. The lack of this kind of response thus far, helps to explain why general equilibrium is becoming fragile, as economic access is limited both by monetary tightening and structural rigidity in nations across the globe.

Stagnation is often a result of populations not knowing how to respond, when a given set of general equilibrium conditions (and resource allocation patterns) has matured. Policy makers are especially reluctant to deal with root factors which could alleviate the situation, this time. Meanwhile, as one political candidate in the U.S. pretends she'll bring more people into general equilibrium conditions, another remains convinced that it is still possible to do so. While this approach has proven effective in the past, the combination of today's regulatory environments and existing budget obligations, make it unlikely now.

Another common response: "nothing can be done, so just deal with it". However, there's a real problem with this form of resignation. No population will wait for very long, before they begin shifting resource allocations, in response to an inadvertent zero sum environment. An interesting example comes from "Medieval Households" by David Herlihy. In the early Middle Ages, existing resource allocation was fairly abundant, hence property was generally passed down to both male and female heirs. It was only as existing resource patterns gradually matured (over a period of centuries), that more groups responded by reducing property ownership for women whilst giving them stronger marriage roles.

Only consider the "new equilibrium" circumstance offered by New World settlement, which once again broadened property ownership patterns. Even so, it is today's extensive housing requirements which mean hard compromises for family heirs regardless of gender. Hence the reality of property which simply can't be divided - due to the illusion this way of life is "necessary" - means a continuing problem for asset management among family members.

Lifestyle illusion also revolves around the notion that some forms of service participation are not "desirable" (hence the struggle for high income service employment), while other sets of knowledge based services need to be protected so as to preserve income for those who now participate in them. From a recent post by Scott Sumner, Gregory Clark's review of Robert Gordon's recent book echoes this fatalism:

The core of Gordon's pessimism about future technological advance is that the modern U.S. economy is now heavily based around services, accounting for about 80 percent of output. Manufacturing, traditionally a sector with higher efficiency advance, has shrunk to 12 percent of the economy...A surprising share of the modern jobs are the timeless ones of the pre-industrial era...Even outside services, we can find jobs with no gain in productivity since the Industrial Revolution. Builders price books in eighteenth century London show the rate at which bricklayers laid bricks in house construction. In 1787 this was 75 bricks laid per hour. For modern England the rates are lower, 225 years later, at around 50-70 per hour.

The last part of this quote is particularly stark. Why is anyone concerned about how fast individuals can lay bricks, given technology's ability to completely transform living accommodations and building components? The heavy resource use that populations continue to rely on for almost all development, only illustrates how lifestyle illusion has seemingly upended the possibility of bringing non tradable sector activity into the realm of reality.

When populations reason that a given lifestyle is the only one possible or desirable, they end up struggling to maintain their own position in a suddenly stagnant economic reality. Unfortunately, the innovations that were needed most, came to represent a threat to the special interests which grew rich because of the ways they themselves contributed to lifestyle illusion.  And when civilizations attempt to remain in place, everyone becomes relentless in securing their own gains. Historically, time and again, civilizations have taken too many steps backward when this has happened. Like many, I grew up believing that the fact we were taught about historical atrocities was enough to prevent them happening again. Turns out that was quite false. People need economic means, so as to not repeat them. As Edmund Phelps summed up in a recent post:

It is the impediments to adaptation and innovation - not fiscal austerity - causing our stagnation. And only renewed dynamism - not more fiscal irresponsibility - offers any hope of a durable way out.

Notes on Basic Income, Meaningful Work and Equilibrium

Recently, Andrew Walker at BBC News (HT Lars Christensen) noted some details about the basic income approach, as it is currently being debated in the UK. This dialogue is commendable, in that it seeks solutions on a number of levels. What I find useful are the attempts to strip away some of the legal complexities, which make it difficult to sort through welfare costs and obligations.

Even so, while basic income might simplify overly complex systems, real barriers remain. Policy makers are trying to find ways to integrate the marginalized, in the already existing consumption expectations of general equilibrium. Or, one way to frame the issue is this: how does one "fit" small wages into the high wage expectations of today's prosperous non tradable sectors? For the UK, these obligations overlap in at least three areas: housing costs, insurance and taxation. Tim Blackwell of the New Statesmen, considers what might happen to someone dependent on a basic income:

...the combined effect of tax, national insurance and the withdrawal of housing benefit and council tax support was to leave the individual with just over 10% of any additional income they might earn.

Equilibrium variance in terms of income, is why I've suggested that local corporations take on the task of sorting local wage and income structure away from the expectations of state and nationally defined economic equilibrium. It is not always easy for anyone with small wages, to participate in the non tradable sectors which provide much of today's wealth for both governments and private interests.

As to another consideration regarding the above link, there is good news in the form of a recent Gallup poll. First, from closing comments in the above article:

Some argue that if there is a guaranteed basic income, some people will choose not to work. For many the idea of simply giving people cash is very unpalatable.

 Here's what Gallup recently found (HT Sarah Gustafson at AEI):

What the whole world wants is a good job. This is one of the most important discoveries Gallup has ever made...Our World Poll across 160 countries found that over the past 100 years the great global dream has changed from wanting peace, freedom and family to simply wanting to have a good job.

 Gallup's research has found that of the 7 billion people on earth, 3.2 billion are adults who dream of having a good job. That is what they want more than anything in life. We define a good job as 30+ hours a week for a paycheck. The problem is that when our World Poll asks how many people have a "good job" as defined this way, only 1.3 billion do. So the world is currently short about 1.9 billion real jobs, or what we would call "good jobs".

One thing to consider, is that those "good jobs" have been generated on asymmetric terms. In other words, secondary funding channels for knowledge use (through asset formation and traditional manufacture) are not a monetary flow result which is capable of full integration. One only need look at remaining pockets of either poverty or inadequate service formation in developed nations, to see how this has been the case - time and again. Symmetric compensation - in the form of knowledge use systems through local corporations, could go a long way to fill the gaps.

However, these local systems would alleviate what would necessarily be small wages, through alternative equilibrium structures. By separating the requirements of local non tradable sector activity from primary or general equilibrium, local populations could generate vastly reduced internal costs, for both time based product and local housing/infrastructure needs. What would have been taxation for infrastructure and services needs, becomes local group investment and time based coordination strategies. Hence primary connections to surrounding economies, would be through the (already existing) frameworks of tradable sectors.

Whether or not governments are able to bridge the needs of the marginalized (through basic income) with those of general equilibrium, remains to be seen. What is interesting in this regard, is that common ground is being forged between different factions - some of which are presently concerned about a lack of meaningful work, versus those who would like to be rid of unnecessary legalities and complexities in a time of strained budgets. Tight budgets make it difficult to recreate the kind of "good jobs" that so many believe to be necessary for a good life. Even so, real innovation in non tradable sectors can still bring a good life and meaningful work, to small wages and small incomes.

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,

Equilibrium Access? Decentralization is Needed

After all, decentralization would allow possibilities for alternative equilibrium that would make like easier for some, without being problematic for others. Problems ensue when too many aspects of production and consumption become defined on government based terms. The result is a primary equilibrium which struggles to generate broad access - from a centralized vantage point - for wildly variant incomes and budgets. How do producers and consumers manage to access infrastructure settings which have far too much in common?

Often, they don't. Yet many failed attempts in this regard, appear as though "arbitrary" (i.e. discriminatory) exclusions. Another way this process plays out is through blanket forms of monetary compensation, which - by raising the (single) equilibrium level - continue to undermine the original goal of economic access.

Richard Cornuelle - who I highlighted in yesterday's post - built an organization which proved "tempting" for government - hence ultimately led to an example of the latter process. His efforts to generate a functional independent sector for student loans, were gradually replaced by the entry of government into the same setting. The problem? What once served as a way to target low income students who had the drive and initiative to succeed, was replaced with student loans for everyone. As Cornuelle noted,

The effect of the federal program has been to undermine the confidence of commercial institutions in the credit-worthiness of college students, and they are destroying the very thing they set out to promote.

Considerable incentive exists on government's part, to scale up social program business models to the greatest degree possible. In this instance, educational costs have also increased more, than otherwise would have been the case. Any "blanket approach" of compensation for economic access - as opposed to closely targeted needs - eventually spreads out across the equilibrium as a whole, raising the bar of entry for everyone.

Many circumstance that involve limited access in primary equilibrium, have been viewed as various forms of discrimination - a process which of course includes gender. As universities continue to favor out of state and international students because of higher tuition charges, discrimination could appear as though applicable to most any group imaginable.

How could decentralization help? The biggest concern is a lack of space for economic participation at the level which so many are expected to prepare for. Democracies can become stunted, when people are forced to adhere to the same limited choice sets in one equilibrium. Even if every student were fortunate enough to access the "right" university and make the grade, little else would be different, afterward. Of the universities most likely to survive a higher education shakeout in coming decades, the "survivors" will more closely reflect the actual high income options available after graduation.

Given this unfortunate situation, it would be beneficial to generate new forms of infrastructure patterns that are capable of allowing smaller incomes to accomplish far more than is now the case. Fortunately, the lower costs of digital education will provide a good starting point.

The need for alternative equilibrium solutions is actually a recent development. In mid twentieth century, income levels were more closely aligned, and Washington was able to contribute to infrastructure in ways that provided real gains for all concerned.  However, it has become difficult for most centralized governments to provide large scale infrastructure projects. It is all that many municipalities can do just to maintain the existing infrastructure which exists now, and future communities will need to seek out forms of infrastructure which take a different approach for all concerned.

Possibly the main problem for primary equilibrium, has been the pressure to leave most housing costs at a price point which makes it difficult for lower income level households to purchase food without government assistance. This is inexcusable, given the fact that food costs in the U.S. overall are more reasonable than anything else one needs to purchase on a regular basis. Lower income levels should not have housing expenses that are 47% of their income.

However, new communities will need organizational patterns which allow local citizens to invest in both land and building components, so that no one need commit more than a third of their income to housing investment unless they actually want to. Not only would these investment structures provide means for incremental growth, but also a shared community base which makes an alternate equilibrium possible.