Some Thoughts on Equality of Opportunity

Do people argue for equality of opportunity, as opposed to equality of outcome, in "bad faith"? Why would anyone do so? There's no need for me to single out the specific arguments against equality of opportunity as a legitimate concept, which I recently spotted. And after a strong response from a commenter on a post regarding neoliberalism, I'm concerned about coming across as antagonistic, which is not my intent. Suffice to say, I was taken aback, once I realized there are bloggers - and others - who have a strong aversion to "equality of opportunity" as a legitimate argument.

Much as the reality of rich and poor, equality of opportunity is a relative state which still deserves acknowledgement and action. The right to produce goods and services for the public - for example - is a dramatic example of equality of opportunity. Why not strive to make certain that opportunities aren't lost, instead of losing further ground by reasoning they don't exist in the first place? Better odds of success are possible for all concerned, when inequality is approached with the intent of improving economic access.

In other words, plan for opportunity in terms of resource use and access, instead of seeking greater equality through increased redistribution of outcome. This initial or prior approach increases outcome potential and long term growth, whereas an outcome based approach only encourages further divisions over already existing resources. In particular, specific supply side methodology for increased non tradable sector production and consumption, would contribute to long term growth. When most marketplace capacity is defined so as to exclude low income levels from production and consumption, it's understandable that equality of opportunity may not ring true.

Another important consideration for equality of opportunity, is to consider how time and skill contribute to efforts and economic outcomes. Even though it is not widely recognized yet, new horizons are opening for personal time value in terms of production and consumption, which didn't exist before the technological gains of the present. Equality of opportunity is inherent in the process, due to the use of equal time value as a starting point for service product coordination.

Time value has an important role in its own right, as a function of mutual coordination capacity, while skills capacity responds best to resource application. When individuals are responsible for their own time management and resource decision making processes, time value and skills capacity are not limited to a single role, in terms of the wealth that accrues to both individuals and groups. Both organizational capacity, and the alignment of skills potential with resource capacity contribute to economic outcome.

The separate functions of time value and skills capacity in the workplace, are sometimes missed. This is understandable, given the fact that 20th century employment by others often meant applying time and skill along a single path of resource application. In some respects, the employment model which combines personal skill and time value in a single output trajectory, is outdated. Yet it has proven difficult to move past a mindset in which personal time and skill - in relation to specific resource sets - is mostly determined by one's employer.

Generally, when individuals are self employed in some capacity, time and skill options can also be applied along different paths to achieve greater outcome potential. Time arbitrage would assist this time management process, given the fact individuals in groups would hold both entrepreneurial and mutual employment roles. Sometimes the paths of time and skill use would merge, whereas in other instances they would become quite distinct, in terms of output potential and quantification.

Personal skill in relation to resource capacity, particularly defines the output potential of tradable sector activity. Indeed: much of what is now considered "uneven" in terms of economic opportunity, originated when compensation increasingly took into account the degree which one's unique skills capacity was able to contribute to the marketplace output of tradable goods. Skills arbitrage employment roles gradually developed in relation to total resource capacity - not just that of nations, but to some degree of international wealth.

Unfortunately, asymmetric compensation for time based product does not contribute to increased marketplace output in the same way. Even though greater skills capacity resulted in better time based product, it did not increase marketplace output. As a result, even as the marketplace expanded for tradable goods, time based product did not have the chance to achieve the marketplace outcome that populations sought.  This is why asymmetric compensation is not as effective (in terms of macroeconomic outcome) for the time based product of non tradable goods, as for tradable goods.

Time arbitrage could eventually create greater marketplace representation for time based product. There's another opportunity aspect to time based product, as symmetrically matched and compensated. Many forms of knowledge and skill which end up "pushed aside" in a society which devotes many resources to critical knowledge, would once again gain room for fuller expression in society. By assigning equal time value to knowledge use, groups can coordinate for time and skill value in ways that provide more equal opportunity for knowledge diversity as a whole.

Free Competition as "Random" Innovation

What if no one anticipates real innovation in the future, because substantive change would prove too disruptive for general equilibrium conditions? While "sticky markets" have their own problems, they contain elements of stability that can't be ignored. Free competition for infrastructure, building components and time based services, would be too random in many frameworks. Even knowledge use systems need to make infrastructure choices at the outset, hence couldn't use a full range of options in each instance. Instead, each community could provide variations for building components and infrastructure choice, rather than replicating the same choices over and over again.

Meanwhile, marketplace innovation (of a sort) continues apace in less disruptive forms, such as adult coloring books. Ah well! Joshua Gans writes:

We don't speak of it very often but economists face a fundamental challenge with respect to innovation: if innovation is something no one has anticipated, then the (Savage) axioms upon which we base our rational choice decision-making cannot apply. Let me explain. Decision-making is all about actions and their consequences. Leonard Savage created the framework by which economics deals with this by assuming that all agents "look before they leap". That is, an agent would choose amongst actions available taking into account all possible states of the world and the consequences in each state. This requires agents to have complete knowledge of the state-action space.

He notes that while rationality is bounded, innovation is random, hence it's fundamentally impossible to plan everything out. I would add that in general equilibrium conditions, the "irrationality" of innovation can also disturb interconnecting price structure. Further, any desire to maintain given structural "knowns", can lead to the cost issues which occur with naturally arising monopolies. As Adam Smith explained:

The price of monopoly is upon every occasion the highest which can be got...free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, for any considerable time together. 

Even knowledge use systems would need systematic organizational capacity, to allow free competition for time value in understandable context. In such a marketplace, layered sets of options for time based product would be staged in regular intervals, thereby making it easier for individuals and groups to coordinate preferences and desires. While some forms of time based product would occur on spontaneous terms, others are ongoing and more fixed in nature. By coordinating for time value, innovation becomes a reference to broad organizational capacity. Still, the primary innovation is coordinating for mutually desired cost savings in a non tradable sector environment.

While knowledge use systems aren't completely random, they nonetheless incorporate free competition to a degree that a base wage structure can be highly effective. By moving a combined set of common costs (mutual goals) closer to the participants involved, fewer resources are needed in aggregate which would otherwise force everyone to "move further" to reach local non tradable sector costs. This makes it possible for all concerned to focus on the life challenges of disposable income, instead of losing disposable income options to non tradable sector formation, as so often occurs in general equilibrium conditions.

Notes on Coordination Issues for Time Dependent Product

Not all product formation leads to the same economic results in the marketplace. And presently, economic capacity - in the broadest sense - still depends on whether product originates from tradable or non tradable sectors. Knowledge based product is largely time dependent, even though some aspects of services product will always be viable with little need of time or labor compensation. Granted, separately existing knowledge product (which is replicative) can reduce labor costs in budgets - a process which also smooths time based coordination difficulties for asymmetric compensation.

Even so, replicative knowledge is not sufficient, insofar as individuals experience knowledge as a truly valuable experiential or practical good. If a strong growth trajectory is to be regained in the near future, organizational capacity needs to make the most of time aggregates as a whole, instead of only utilizing the most skilled in the marketplace to generate replicative and non time dependent product. The most important forms of services provision are about individuals in relation to one another, not just individuals in relation to existing institutions. Monetary policy would also need to make this service product distinction, so that broad based  backing of local services creation would be possible.

Presently, the critical differences between time dependent non tradable sector activity, versus non time dependent tradable sector activity, are not being taken into account. As a result, product from both sectors is treated as though interchangeable. While interchangeability occurs to some degree for the higher income levels of general equilibrium, this process doesn't hold for small wage settings.

As a result, time based services for small wages and income, need additional coordination within a separately existing and time based continuum. Granted, one does not often think about the problems that occur when general equilibrium tries to "fold" in small wage capacity. Possibly the best example in this regard, are painful discrepancies for services coordination at lower income levels, in hospitals which constantly have to make hard decisions whether to even assist people who won't be able to pay for services.

Meanwhile, time based services product is still treated as though abundant, in spite of the fact that relative to other forms of wealth creation, asymmetrically compensated knowledge use will only become more scarce with the passing of time. And yet consider how Brad Delong defines an age of abundance in a recent article:

The challenges we face are now those of abundance. Indeed, when it comes to workers dedicated to our diets, we can add some of the 4% of the labor force who, working as nurses, pharmacists, and educators, help us solve problems resulting from having consumed too many calories or the wrong kinds of nutrients. 

Note the fact Delong doesn't distinguish between the real abundance of tradables product, versus the supposed abundance of purposeful application for economic time value, particularly in a time of declining labor force participation. The 4 percent of the labor force he cites for instance, is not equivalent in terms of actual marketplace capacity in the same sense that is true for agricultural workers. Why? Time based product includes ongoing economic activity in both supply and demand of time value. Delong continues:

More than 20 years ago, Alan Greenspan, then-Chair of the US Federal Reserve, started pointing out that GDP growth in the US was becoming less driven by consumers trying to acquire more stuff. Those in the prosperous middle classes were becoming much more interested in communicating, seeking out information, and trying to acquire the right stuff to allow them to live their lives as they wished.

Does anyone see some problems with Delong's assumptions? Too few are taking into account, a still existing dependence on previous wealth (particularly that of the now less "desirable" material stuff!) and government redistribution, to create the knowledge based services product which is now sought. In order for time based services to contribute to the "abundant" marketplace Delong imagines, they need a front row seat where it becomes possible to originate new wealth through knowledge use. There is no avoiding the fact that fiscal policy of the future will become mostly limited to the higher income needs of general equilibrium, and knowledge based services will need to be generated on more closely coordinated monetary terms for lower income levels.

This post actually began with some thoughts about recent efforts to expand liquidity through negative nominal interest rates. The comments section in a recent post from Nick Rowe, prompted me to retrieve an older post from Miles Kimball, in which he compared negative interest rates with an earlier strategy on the part of Silvio Gessell, for stamped money. Both represent efforts to increase liquidity which are sometimes difficult to provide, otherwise. I need to spend more time with these referenced links, but want to at least express some initial thoughts about the possibilities of a negative interest scenario at national levels, as opposed to the local levels which do not fully participate in general equilibrium conditions.

Coordination issues between time based services and other resource capacity would likely remain unchanged in national economy general equilibrium, through the sole contribution of negative interest rates. However, negative interest rates would allow for economic gains in tradable goods and stabilization of assets - both of which are no small feat. One problem would arise just the same, should governments expect to eliminate the use of cash, in that most finance costs are too high at the margin for those with small wages and income. If nothing else in these potential circumstance, groups with small wages and incomes would need to tend to monetary arrangements through locally managed means, to maintain economic viability.

While negative interest rates wouldn't benefit coordination for time based services nationally, local stamped money settings might partially fulfill this role, given the fact that this money would circulate within specific groups which already seek ways to coordinate time value among one another. This desirable liquidity component is quickly lost at national levels, however, where additional monies quickly enter the exogenous realm of tradable sector activity. Indeed, stamped money would need to note the difference between endogenous and exogenous wealth origin.

Non tradable goods and sectors are those most closely associated with income. Time value, knowledge based services and the assets which reflect them, are often the local environments in greatest need of stabilization. Fortunately, the stabilization of tradable sectors through negative interest rates in the short term (i.e. till more growth becomes possible), could also assist this process. In all of this, the environments which are most important for nominal stability, are those that are also endogenous and time dependent.

For Long Term Growth, Proactive Responses are Needed

Unfortunately, Robert Gordon's dismissal of long term growth potential, is emblematic of a passive approach which has likely contributed to changes in economic circumstance since the Great Recession. His rationale is but one example, how long term growth needs a more proactive response, than has been the case thus far.

But in the meantime, there's supposedly "solace" to be had, in resignation! People are encouraged to believe that in terms of the real economy, "little" can be done. Paul Krugman also reviewed Robert Gordon's recent book, for the New York Times. One of the things which struck me about Krugman's review, was the fact he wasn't inclined to question Gordon's assertions about the lack of future growth potential ("Is he right? A definite maybe.") Krugman continues:

Robert J. Gordon...has been arguing for a long time against the techno-optimism that saturates our culture, with its constant assertion that we're in the midst of revolutionary change. Starting at the height of the dot-com frenzy, he has repeatedly called for perspective. Developments in information and communication technology, he has insisted, just don't measure up to achievements. Specifically, he has argued that the I.T. revolution is less important than any of the five Great Inventions that powered economic growth from 1870 to 1970.

Also, here's Robert Gordon in a recent Bloomberg View post (part one of two), entitled "Goodbye Golden Age of Growth":

The rise in the U.S. standard of living from 1870 to 1970 was a special century--and won't likely be repeated...Future growth in output per person, therefore, will fall short of growth in output per hour. 

And he reasons:

The good news is that the economy will be able to maintain relatively full employment as the fruits of computerization cause work to evolve slowly, rather than in a great rush. I'm optimistic that job growth will continue and that new jobs will appear as rapidly as technology destroys old ones. 

Regular readers likely know where I find fault with Gordon's assertions, as to a supposed lack of potential for future growth and gains in living standards. Technological gains created the possibility of a completely new foundation for communications, knowledge use and physical infrastructure as well. This foundation could transform our burdensome non tradable sectors, which now sap the collective will and resources of governments, citizens and tradable sectors alike.

Yet organizational patterns which could contribute to widespread gains in knowledge use application, have scarcely begun. The same I.T. revolution which Gordon has downplayed, is the same infrastructural mechanism which could act as the conduit for a completely new services based economy. As to those "horrifying" aspects of slow Southern development he described, I can attest (as someone old enough to remember baths in a washtub), that it is more horrifying to be left out of economic loops at some point in one's lifetime, than to experience living structures which don't necessarily have every basic amenity.

I also need to address Gordon's apparent confidence that the economy can maintain relatively full employment, should structural shifts in organizational capacity (innovation) not be given a chance to take place. Granted: for a long time, new jobs appeared as quickly as old ones disappeared. However, a gradual decrease in knowledge based work as tradable sectors shift to non tradable sectors, has not been acknowledged. Given the fact that so much of non tradable sectors are supposed to be about knowledge work, this is what is truly "horrifying" so to speak.

The future growth in output per person which Gordon mentions, is directly tied to the knowledge use potential which could make human capital a direct component of wealth creation. Further, this is the missing element of capital as a whole, which has so many onlookers still mystified. Another important factor is that current services formation places too many participants outside of actual production capacity, at all stages of life.

In fairness to Gordon's continued observations, however, much of what attempts to pass as innovation in public dialogue is not real. Only consider how vested interests frequently promote what amounts to artificial "disruption", so as to prevent the real thing from happening, as was pointed out in this Techcrunch Davos presentation:

It's clear that the Forum gets whats happening and the Fourth Industrial Revolution is a critically important topic, but it's being filtered through a corporate reality of these large players carefully controlling the conversation...This is dangerous.  

By continuing to operate under the assumption that the biggest multi-national corporations are on the cutting edge of disruption, we risk not acting on globally significant opportunities like radical reform of education systems, government bureaucracies, energy management and transformation of transport systems...In the words of Buckminster Fuller, "We need to build new models that make the existing models obsolete."

Exactly. It's not so much I am intent on "destroying" outdated models, because oftentimes that's not the point. I just don't want outdated models to have the chance to needlessly destroy us. And right now, some of them (including wrongheaded monetary reasoning at the Fed) would do so, if nothing is done to short circuit all the hand waving and high profile excuses.

When The Political Chickens Come Home to Roost

Perhaps - crazy as it seems - today's unsettled political climate has been a long time coming, given the amount of discord and refusal to cooperate in high places that has already occurred. Now, as governments are increasingly forced to spend less, Jim Geraghty of the National Review asks, "What if the American people don't want smaller government that spends less?"

Scott Sumner responds:

It's meaningless to talk about public opinion on "big government". The public doesn't even know what the term means...And since their views on taxes and spending are impossible to meet, in a very real sense they have no opinion.

No one really seems to know how to "connect the dots", for positive action which is actually feasible. Take just one issue of the (earlier) small government agenda: entitlement reform (since audits of Defense weren't likely...). Even though such reforms are needed, they pose real threats to those who maintain solid access to general equilibrium conditions. Democrats and Republicans alike, strive to uphold the promise that these more prominent forms of access will not be lost. Territorial grabs wouldn't be so problematic, were it not for the fact their revenue conditions are increasingly built on economic exclusion.

For those who are concerned about the economic access which has already has been lost: should nothing be done, today's reduced labor force participation is but a sample of what could occur in the near future, without a marketplace for time value. But where to begin? At what point in a given equilibrium, can one begin to make the structural adjustments which would also mean dramatic improvements in monetary policy?

It's complicated. For one, no broad based structural changes should be imposed on any entire public, given the different circumstance with which so many live out their lives. This helps to explain why "one size fits all" government attempts in recent years have gone nowhere. Only consider earlier discussions re phasing out social security, and how difficult it was to agree upon cutoff points or potential replacements.  And, the fact that the U.S debt situation is looking about as good as will be the case for the foreseeable future (according to James Pethokoukis) is another indicator that the chickens are coming home to roost. There's still time to act. But these issues need to be addressed now.

Smaller governments are needed. But they are needed on terms which can gradually fold services capacity - and people - back into the marketplace, as direct contributors to wealth formation and economic activity. Until this occurs, everyone will remain uncertain how governments can reasonably apportion services capacity to the "deserving", and voters will be asked at the polls to make increasingly harsh judgments in this regard.

Why haven't economists been able to address these circumstance, already? Twelve years earlier when I started this project, I was still in awe of economists, in that I believed they were capable of rising above the social and political fray. Consequently, I believed (and still do) that potential solutions for world issues can be found in economic ideas.

Since then, I've slowly had to learn that economists don't particularly relish the role of system wide confrontation, which in retrospect makes sense. Why would economists want to jeopardize their standing with the special interests which also have considerable bearing on their livelihood? To what extent does ideology stand in the way of broader growth potential? However, it isn't so necessary for economists to be able to forecast every recession, as to do a better job of indicating when economies become too fragile because of access issues. These issues also lie at the heart of nominal income representation.

In fairness to economists - perhaps - it has not been easy to suggest solutions in general equilibrium, because doing so means pointing out supply side circumstance that occasionally run counter to a need to maintain flexible wages and overall access. Hence it's often easier for economists to suggest partial adaptations (specific to individual circumstance), instead of taking overlapping effects into consideration.

Minimum wage discussions are an example. It makes good sense to argue against minimum wages and I've done so plenty of times. Why, then, has the public (and increasingly more economists) moved instead towards support of a "living wage"? This is not the solution it seems, because wages need to be considered in equilibrium context. However, the focus tends to swing back towards "living wages" when general equilibrium has too little means to adjust for income potential.

Instead of forever "chasing" small wages with government subsidies or mandated employer dictates, income potential needs environments which are conducive to the actual sources of revenue that they represent. In order to make this possible, individuals need more say, in defining the primary non tradable consumption components of their lives. Everyone needs valid roles in the production of their own environments. But who has really been able to suggest equilibrium level strategies?

Otherwise, even though the great majority of tradable goods can be had by low wages, much of the non tradable sectors are not accessible to lower income levels. It is the lack of inclusive reforms in these areas, which now makes it difficult to find logic or reasoning in the political sphere. I believe that political solutions could be sought at the margin, through alternative equilibrium where it is possible for people to create more accessible services and asset structures.

Even though this post touches (once again) on long term growth issues, the U.S. growth trajectory is still in doubt, due to the seeming insistence on the part of the FOMC of undercutting nominal stability. In a post entitled "The Sky Is Not Falling...Yet", David Glasner notes:

The 2008 financial crisis ensured the election of Barak Obama as President. I shudder to think of who might be elected if we have another crisis this year.

Indeed. Will the Fed continue to overreact to - hence magnify existing problems in structural issues? Let's hope not.

Economic Freedom, in Public and Private Context

Are societies more free, when organizational capacity is geared towards private settings? This matters in part because public and private delineations for economic vitality, are not as clear cut as they might seem. Rationalizing that something "should" be designated private, to maintain freedom of choice and personal action for as many as possible, assumes that organizational capacity automatically strives to make it so. We reason that private enterprise is ultimately responsible for economic growth and vitality, because it is.

In reality, economies slowly break down, when private interests choose personal gain over the growth creating conditions of marketplace inclusion. Further, when private enterprise chooses personal gain over economic vitality, this occurs with government "blessings" at a basic structural level. As personal and social freedoms are lost, the process takes place in ways that are often not easy to recognize.

Why are these structural and supply side circumstance not better understood? Instead of seeking more freedom for production and consumption options, political interests align to procure more of the proceeds of an artificially restricted marketplace. In other words, political parties clamor for a bigger portion of a pie; one which they have already played a role in making smaller to benefit their own members. How to create new marketplace growth, instead, which includes greater means for economic freedom?

It wasn't always this way, and the constitutions of today's nations were often written when individuals had more freedom, to produce and consume what they sought in the marketplace. Those earlier freedoms tended to make clamors for "living wages" unnecessary, for wages and income went further when individuals could define and create product through their own means.

Slowly but surely, restrictions in the definitions of production and consumption, led to less freedom and economic opportunity. The Great Recession should have been a major indicator that something was wrong in this regard, but policy makers and economists alike proceeded as though little needed to be addressed - either in terms of economic theory or organizational capacity.

Even though the details of cronyism have begun to make their way into public dialogue, these discussions have yet to offer any structural remedies. Cronyism becomes possible when too many individuals assume that someone else is always willing to look out for the public interest - even if the public isn't really concerned about the particulars. But how can anyone - public or private - be expected to remain conscientious about resource management, if no one is paying attention? Hence the ways in which groups agree to coordinate and account for resource capacity, need to be better understood by all concerned. In order to rethink production and consumption priorities, economic time value also needs to be at the center of the process.

Fortunately, a greater degree of freedom remains, in terms of the production and consumption of tradable goods. Indeed, a college degree is not always necessary in these sectors, in order for individuals to gain active and leading roles. The greatest problems for economic and social freedom, are in the rigid requirements of the non tradable sectors, both in terms of asset and services formation. Indeed, public or private status designations do not presently get at the root of the problem, which is a lack of time based services product - in both production and consumption terms. If economic freedom is to be regained, reclaiming time value would be one of the first steps taken on this hopeful path.

Income Representation is Central to Economic Stability

Without accurate monetary representation for nominal income, economic stability would suffer - in part because production structures remain dependent on continued income capacity in all time periods. For instance, asset formation - despite the Fed's attempts to maintain economic stability in this regard - is nonetheless an end result of ongoing income capacity.

Income representation is not the automatic mirror of aggregate spending capacity, that it may initially appear. Labor compensation and other income structure, serve as a point of origination for what become broad variations in monetary flows. While these different sources of income flow strongly affect one another, their sector activity does not directly correlate with one another. As a result, this creates system wide non linearity, so that products don't automatically or necessarily provide ready substitutions in the marketplace.

The income capacity which is representative of general equilibrium, occurs in what are already non linear paths of private and public endeavor, alongside further variation in tradable and non tradable organizational structure. While I have spoken often of the services capacity of non tradable sectors, the services capacity of tradable sector income follows a somewhat simpler growth path. How so? Tradable services formation (think sales or restaurant work) is more directly reimbursed, hence closer to the (primary) wealth origination of traditional production. One could think of growth capacity for tradable services income as akin to income in finance and assets, in that it directly relies on (non redistributed) income from all sectors for additional growth.

Non tradable sector income, i.e. that which thus far seeks broad redistribution outside of specific institutions, is also part of the secondary marketplace which is nested within existing wealth. When these forms of non tradable services income experience growth capacity, this reflects gains from the primary markets of traditional production. Secondary markets are largely dependent on primary markets. However, should growth decline in the latter - as has presently occurred - non tradable services income can be especially dependent on accurate income representation from monetary policy, in order to maintain nominal stability.

Not everyone is convinced, that monetary representation is important for economic stability. For instance, in a recent post, Dietz Vollrath asks, "Do you need more money for growth to occur?" First I'll address his question in an immediate sense. Monetary growth may not necessarily need to accompany real market growth conditions in the short term, should the supply side provide broad and innovative means to expand markets through good deflation. However, this has scarcely been the circumstance, given the forms of economic activity which the Fed now take excessive efforts to restrain. The monetary needs of non tradable sectors have led to arbitrary caps for production in multiple capacities.

Towards the end of the above linked post, I unfortunately have some serious issues with his reasoning. Again, Vollrath:

...The level of nominal spending is irrelevant. The stock of money is irrelevant...For any modern economy, it is effectively impossible for there to be "not enough" money to let growth occur.

The stock of money is not at all irrelevant, for that stock needs to closely maintain balance in income and resource capacity. This is what a nominal target can specifically provide. While supply side circumstance might not provide sufficient (wealth) balance between services formation and other forms of production, monetary policy has an easier job in this regard than central bankers have been willing to let on.

Maintaining nominal income levels is important not just in the sense of asset formation and loan responsibilities, but also the stability of income flows which regularly contribute to general equilibrium. No one should dismiss the importance of income aggregates and the ways they affect long term growth outcomes. For instance, Paul Krugman notes the non-linearity of present day oil markets, and the fact that expected product substitution in this regard, did not proceed smoothly as expected. Oil price declines do not provide income or product substitution, when individuals do not have income or transportation strategies to begin with.

As it turns out, specific quantities of money are not the ultimate arbiter of economic measure, because the organizational capacity of supply side factors determine ultimate pricing factors in relation to income capacity. However, the mistake is to ignore the important relationship that exists between income potential, and the marketplace capacity which is actually being honored for total resource potential. This is the relationship which a level nominal target would seek to uphold.

Notes on Solow Model Effects in General Equilibrium

I had begun a post yesterday on this subject only to delete it, links and all. Yet today these thoughts remain uppermost in my mind, so I'll try again from a different angle. The Solow model in general equilibrium, is an instance when microeconomic effects also play a substantial role in macroeconomic outcomes. The (internal) labor force substitutions implied by the Solow model, have played out in slow motion in recent decades, as tradable goods formation has given way to the growing wealth of non tradable sectors.

As best as I can tell, interest rates began their long term decline, once the consumption requirements of housing/services and their accompanying credit became more important for non tradable sectors. These revenues provided additional funding for asymmetric compensation, in what could be termed a steady state economy around 1980. Many governments increased their reliance on asset formation during these years, as tradable goods wealth became less prominent. According to Wikipedia,

The steady state economy is an entirely physical concept. Any non physical components of an economy (e.g. knowledge) can grow indefinitely.

Of course - unfortunately - it has quite become obvious that knowledge use has not been able to grow indefinitely, once nations reach a certain degree of maturity in their tradable goods structure. Citizens are increasingly on edge, as the still secondary role of knowledge use, places time based services into the crosshairs of competing groups.

Today's services formation claimed their dominant role in the wealth of GDP, through following the Solow model as it had been utilized by tradable sectors. Again, these organizational patterns kept capital and labor in check, while focusing on output growth. But what about the results? While this time based product approach should contribute to per capita growth, it's the fixed capital and labor (in relation to output), which places internal limits on both time value and knowledge use (human capital) options. These limits - in turn - affect both the nature of time based product, and ultimately the dispersal of knowledge which is associated with time value.

Hence the Solow model for time based services organization, may negatively affect both aggregate participation and aggregate knowledge use gains. Diversity in knowledge use options is at stake, when time value is replaced by separately existing (duplicative) product to protect the bottom line and limit expense in asymmetric compensation.

Instead of knowledge use growth, asymmetrically compensated services increased output by generating product which substituted for time value. One example is the use of prescription drugs, which now substitutes for a wide range of time based healing activities that were employed for centuries. In other words, less time has been asymmetrically compensated for the specific circumstance involved between provider and recipient, to arrive at the desired services product. Likewise for what had been more spontaneous forms of research, prior to the twentieth century.

Why is this problematic, in terms of aggregate output and labor force participation? First, recall that services organization is not yet offered as free standing wealth, and its formation remains nested within the wealth creation of traditional production. Institutions reduce labor costs, in part because asymmetric compensation relies on preexisting revenues. Even though asymmetric compensation is logical - given wide variations in aptitude - this approach remains dependent on a growing tradable sector, in order to maintain employment capacity. Presently, worldwide tradable sectors have become somewhat weakened, by the fact that time value is not a source of wealth creation in its own right.

Consider why the Solow Model was able to maintain strong labor force participation, for so long. The Solow model was perfectly suited for tradable goods formation, given the fact that tradable product value need not be affected with a smaller time component. Also, the Solow model of reduced labor force participation (in time based services) relative to output, was not problematic decades earlier, so long as tradable sectors were growing in relation to non tradable sectors. The present problem occurred, as non tradable sector growth gradually overtook tradable sector growth. Instead of directly addressing the issue as it developed - however - governments in developed nations used asset formation, to compensate for their loss of revenue flows from tradable sectors.

Once the greatest benefits of the Solow model process became sidelined, government compensated by raising the consumption requirements for both asset formation and services product in non tradable sectors. Prior to the eighties, when individuals lost a job, they were often able to gain new work through still growing diversity in tradable goods formation. Finally, tradable goods sectors lost the ability to generate more labor force participation at aggregate levels. From that point forward, services employment developed insofar as these sectors received revenues from asset formation and the remaining redistribution of traditional manufacture.

Clearly, the Solow model - "workhorse" though it remains for tradable goods structure, is insufficient for the potential growth and stabilization of time based services - either in mature economies or developing economies for that matter. When the most important product is time based, one cannot remove time value from the equation and expect the same result in terms of knowledge use diversity and human capital.

Without a clearly designated marketplace which represents the finite nature of time value, productivity is lost because individuals can't discern time value in relation to one another (i.e. comparative advantage). Without this capacity, civility in general also suffers. Hopefully, production gains for the 21st century can be approached through better organizational capacity, than what has transpired thus far.

Comparative Advantage and the Marketplace for Time Value

In a recent article from The Freeman, Michael Munger suggests that comparative advantage should be downgraded as a primary concept, and that trade has evolved in ways which appear to make other factors more important. Here's Munger:

Comparative advantage is not a separate concept at all. It is simply an explanation of the implications of the division of labor and opportunity cost.

For tradable goods sectors, Munger's arguments are reasonably solid - in terms of untapped potential in these areas. As to non tradable sectors, however, comparative advantage has scarcely been utilized in the immediate or personal sense, where time based services particularly count. Not only would comparative advantage in service formation allow for a freer market in services, this concept also suggests organizational shifts in time utilization which have yet to be explored. Until now, comparative advantage in services has often been replaced with hierarchical expectations which have also substituted for knowledge use options.

There are other market considerations where comparative advantage will continue to hold importance as well. The most obvious example of comparative advantage in tradable sectors, is agricultural product which often needs specific geographic circumstance. Geography is also important for comparative advantage, in locally managed (non tradable sector) wealth endowments such as natural beauty, historical tourism and multiple forms of group coordinated experiential product.

How to think about comparative advantage in terms of time use, when time value is an important part of the final product? Unlike product which essentially exists separately from time use, service product not only includes how we feel about the production or consumption process, that impression becomes an actual component of the economic interaction.

This is why comparative advantages between providers, consumers and their mutually associated time/place agreements are so important. Whereas coordinated time and place for tradable goods is often not a central component of these forms of exchange, because tradable goods are mostly utilized - or otherwise experienced - separately, after the point of purchase.

Internally (group) coordinated time based product, would include comparative advantage of one's "basket" of time use options, in the decision to produce or consume. Personal concerns for production and consumption of time based product, would not be about "best bargains" or the like, but rather meaningfulness and effectiveness for mutually shared time. Even so, comparative advantage would benefit from a marketplace for time value (alongside money), for these elements of personal choice to be possible.

A marketplace for time value, would generate local conditions for time to serve (alongside money) as a medium of account, a medium of exchange and also a store of value - albeit in far simpler terms than these associations carry through monetary exchange. Granted, a time based marketplace would be neither possible or desirable, in the normal value in exchange conditions of general equilibrium. Just the same, the spontaneous nature of external coordination also carries asymmetrical costs which automatically limit the services that are possible in general equilibrum.

Time arbitrage would provide the option of symmetrical costs for time value, which could both simplify and increase the availability of services production. To be an entrepreneur of one's own time production, is to add real value. Indeed, it is fair to suggest that - in the eye of the beholder - possibly as much value as any new tradable good in the marketplace.

Time Based Markets as Secondary Markets

Why is healthcare, as a time based product in many respects, "differently priced"? Timothy Taylor notes this as a "market malfunction" in a recent post, and he says:

One of the signs of a well functioning market is that prices for very similar goods or services are much the same in different places.

Clearly, similar pricing isn't the case for healthcare, which for purposes of this post will be included in an overall - or theoretical - time/knowledge use services designation. First, I should begin with the fact that the post title is based on an observation which - as someone who is not an economist - has taken me years to decipher. There are many reasons why secondary markets matter, in that they play a relatively new role for macroeconomic outcomes and long term growth potential.

Imagine secondary markets as encased (or nested) in the primary markets of commodities and asset formation, even though they ultimately take different forms and have contributed to wealth thus far through less quantifiable means. Hence there are different outcomes for both output aggregates and pricing structures in secondary services markets, than one might expect from traditional manufacture, for instance. Cultural factors can also play a role, in the monetary values which are assigned to knowledge use.

Since the most important form of knowledge based product remains linked to time and place, pricing for time based services plays out through a wide range of potential resource capacity. Time based services flourish where resource potential is abundant, yet may be sparse and poorly compensated where (economic) complexity is missing. These factors explain why some time based product is not exposed to the price leveling effects of international markets, which rely on common internal characteristics of specific firms. Even though time based services product needs more "tradable" characteristics, it shouldn't be expected to carry the same pricing characteristics across space and time which apply to time compensation in tradable sectors.

Consider compensated time value from a broader perspective for a moment, i.e. one of general employment capacity. In a sense, any compensated time value can be thought of as a secondary market, and today's compensated time value still originates from already existing wealth sources. However, there is a crucial difference for time value which is compensated as free standing and time based services, versus time value as compensated within specific organizational structures that designate time value according to internal resource availability.

It helps to remember that free standing (defined) services product is compensated "externally" (multiple institutions), either by monetary (private) or fiscal sources, which have in common various local/non local preexisting wealth.* While free standing services product relies on multiple institutions to generate unique time value pricing, compensation for time value within tradable sectors relies on single institutions, for similar sets of internal resource capacity. This is what allows salary formation in tradable sectors to come closer to the pricing levels that are also represented by product which is sold worldwide.

Another important aspect of time value as a secondary market, is that supply side conditions have been more conducive for the resource capacity which generates product existing separately from time value. In other words; commodities, products and asset flows can be bottlenecked by limits in aggregate time value - a process which also reduces much needed velocity. Even though recession is associated with excess demand for money, there is also excess demand for time value - particularly when tight monetary conditions are shorting aggregate time value into the foreseeable future.

Importantly, if formal time arbitrage were to be adopted, it would still be a secondary marketplace much as other nominal income is represented. Also, formal time arbitrage would generate compensation (i.e. prices) for time value which don't necessarily correlate with prices for time value in other economic context. As alternative equilibrium, local corporations would internalize symmetrically coordinated services formation, much as worldwide corporations organize time value for product which exists separately from time value.

Asymmetric compensation for time based services - widespread though it may presently be, remains fragile to changing economic conditions. When the economic circumstance of nations becomes fragile, so too does asymmetrically compensated services formation. In some instances, this form of knowledge based services would no longer be perceived as necessary, should economic conditions not remain conducive for full asymmetric valuations. While individuals would of course continue to desire services, they would nonetheless purchase time based services in relation to personal time constraints and personal resource access. Only consider the differences in this regard for income levels, to note how different services demand could actually play out, in contrast with other forms of product demand.

As a result, time based services are dependent not just on the monetary support of assets or other output, but also aggregate income representation. Hence policy makers should not make the mistake of assuming that time value - as a secondary marketplace - is only a secondary priority. On the contrary, time value should be considered among the highest priorities for central bankers, if economies are to remain stable.


*A bit of perspective: local corporations would coordinate internal resource capacity alongside the compensation of time value for service formation, much as worldwide corporations presently tap internal resources to compensate time value for labor in general. Also, even though time arbitrage would not be dependent on already existing wealth, it would still be a secondary marketplace in the sense that it would need to take place through a system of ongoing organizational capacity.

Both asymmetric and symmetric time value are "unique", in contrast to the common pricing factors of an international tradable goods marketplace. Time value relies on unique conditions and environments, hence unique pricing, and it is highly finite in relation to otherwise "infinite" resource capacity. The danger for asymmetric pricing is to assume that the relationship between time value and other forms of resource capacity is not important.

No Way to Treat An Economy

Decades earlier, I occasionally heard in casual conversation, how recent wars had been a tremendous boost to the economy. After all, war "got us out" of the Great Depression, didn't it? But I had my doubts. Granted, WWII generated quite an uptick of economic activity in the U.S. But how - exactly - did that represent a net gain? War is another good example of reaction (destroy and rebuild) when it proves too difficult to envision economic growth which does not have to destroy something still valuable, in order to take place.

Real gains occur when economic activity augments our time value (through innovation), in relation to other forms of resource capacity. These per capita gains occur when a given market expands through voluntary (i.e. not mandated) consumption patterns. Consider healthcare. Even though healthcare markets previously were not mandated, knowledge limits already prevented them from expanding through organizational innovation. This is why healthcare obligations are a contributor to ongoing losses in aggregate time use potential.

All too often, non tradable sector consumption settings are presented so as to further impact our remaining time use options. For similar reasons, interest on loans can't contribute to actual wealth gains, because they draw from a pool of time availability that is relatively fixed. This process of consumption subtraction (or substitution) occurs across the entire spectrum of consumption potential, for those who take out mortgages. Small wonder that government subsidies for loan formation, have been a major component of tax policy in the U.S.

Non tradable sectors have become notorious, for taking a sledgehammer to the markets most capable of generating prosperous economic conditions. Even though they have generated mass wealth for governments and special interests alike, non tradable sectors have done so through means which have subtracted time value from everyone involved in economic processes. Both asset and services formation represent an ongoing negative shock, in that they now require additional time and monetary support, at all levels of society. This has left tradable sectors little choice - especially with ongoing monetary tightening - but to accept smaller roles in today's economic environments. When tradable sectors lose their footing, nations can also lose their primary rationale, for maintaining positive economic and political relations.

Sometimes, the language of shocks scarcely touches the surface of positive or negative effects which ripple through supply side circumstance. Positive shocks tend to be of a technological nature, but they come in other forms as well. These shocks provide gains in time value, as contrast with other forms of resource capacity. This is in contrast to negative shocks, which also include earthquakes or terror attacks which also require repairs and rebuilding. Lars Christensen describes shocks in a recent post as a component of forecasting:

...a shock by definition is exactly that something you didn't see coming.

Shocks of all kinds can affect growth trajectories, but some do so in more obvious ways than others. Whenever a given growth level is reduced from a recent trajectory - such as occurred with the onset of the Great Recession, shocks take on additional importance. How does one discern possible effects on a given growth level? It depends on how supply shocks interact with with other resource capacity, in its current configurations.

Generally, when the price of oil declines, this appears as a positive shock. However, the most recent drop in oil prices did not encourage consumption as before, given the fact that a larger percentage of the population had already fallen away, from the production capacity they held prior to the Great Recession. Governments have yet to come to terms with the fact that in order to consume, individuals need the ability to produce something of value for the economy as well. For time based services, aggregate demand also requires additional aggregate supply. The present lack of labor force participation, partly explains why some were unable to fully participate in the transportation gains of lower oil prices.

Oil as commodity, is just one example how non tradable sectors have become long running negative shocks, which now impact consumption potential for tradable sectors. When individuals do not participate in major expenses, chances are they minimize their minor expenses as well. Again, the broken window fallacy shows that seeming positives, are not always positives. All the more true, when wealth consists of wealth capture. According to Bastiat:

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another.

When governments and special interests impose harsh restrictions in terms of production capacity and innovation, economic malaise and frustration is the result. That's no way to treat an economy. Let's hope that recent rumblings regarding a third world war will subside, and nations will once again embrace growth and prosperity while there is still time to do so.

Infrastructure: A Matter of Connecting Networks

In a recent Harvard University article, Ricardo Hausmann approaches inequality from a somewhat unique perspective. He stressed that the real problem concerning capitalism, is that people have not been able to create capitalism in the places where populations could benefit from it the most. All too often, infrastructure needs have proven greater than what governments are able to provide, or what other institutions thus far have been able to generate. Here's Hausmann:

The poor are not being exploited. They're being excluded from the higher productivity activities. It's not that the capitalists are taking a very large share of what they produce. It's just that they produce very little in the first place. 

Hausmann continues:

Modern capitalist production requires the simultaneous access to many different inputs. The lack of any of these inputs has disastrous consequences...The conditions for high productivity are very hard to achieve everywhere, but much easier to achieve in a few places.  

He notes that governments are forced to pick and choose, which locales within a nation's borders can benefit from additional infrastructure. In summing up the article, Hausmann also makes some suggestions. Not only could technology reduce infrastructure costs (so as to provide more access); but where possible, those who benefit from infrastructure gains could share in the costs. In recent months I have stressed that local corporations would be able to generate broader economic access, in part based on those suggestions.

However, much more than innovation and reduced costs are involved. Local corporations would need to link together different networks into a single "package" - one that could reconfigure non tradable sector activity through a common perspective. Normally, fully functioning economies are difficult to construct "from scratch", because of the complexity of multiple factors.

Such factors need more than a little serendipity to occur, in that they generally operate as separate institutions with completely different goals and missions. How could multiple efforts - which so often work at cross purposes to one another - instead be internalized and combined? For the remainder of this post, I'll touch on five areas, which local corporations and their participants would seek to integrate.

1) Local monetary and fiscal union, for non tradable sector activity. In contrast to the complex organization of national government in this regard, local corporations would create a simple monetary economy (albeit with complex knowledge use) built on incremental growth, rather than loan capacity. By generating new wealth through matched time capacity, local corporations would no longer need to draw on outside time based services, subsidies, or other forms of entitlement from their surrounding governments.

2) Knowledge acquisition, maintenance, preservation, research and ongoing utilization. Knowledge use systems would coordinate knowledge sets through other communities with the same structure, and remain open to international dialogue as an integral part of long term growth strategies. These systems would also serve as repositories for knowledge sets which may not have other "homes" that they are readily associated with.

3) Physical infrastructure platforms for core and periphery. In particular, core infrastructure is where innovation and costs need to provide economic access which otherwise might not be an option for anyone with limited resources. Primary usage patterns (basic lifestyle options) would be determined at the outset of new community formation, and the core would gain its initial (unique) structure from these. Peripheral connecting networks - and the local investment patterns that are associated with them - could be completed, once communities become confident and gain their footing.

4) Asset formation. While some elements of environmental definition would be determined at the outset, building components for living and working would often remain flexible, in the sense they could be reorganized and/or possibly replaced as needs change. Incremental ownership includes the physical shares of building components, alongside the financial component in the form of local land shares which can be internally traded with other system participants.

5) Tradable goods formation. As local corporations start to mature and take on recognizable form, production possibilities beyond local community also come into play. In some instance these might include openings for non residents who wish to gain a local retail presence. Other times, either knowledge use or physical resource capacity would be coordinated for both experiential goods and tradable product that contributes to wealth beyond the actual community.

Some Thoughts on Economic Stability

Recently, Scott Sumner asked, "Is the free market economy stable?" While there are a number of ways to think about this question, economic stability begins with accurate monetary representation. Even though supply side factors can contribute to overall uncertainty, some components of economic stability have been the sole responsibility of central bankers, for the past century.

What has been problematic since the Great Recession, is that the Fed has not openly acknowledged the centrality of the monetary role, for economic stability. Instead, policy makers have allowed important monetary considerations to be derailed by other issues in FOMC debates. In the above linked post, Sumner notes:

Friedman, Hetzel and I all share the view that the private economy is basically stable, unless disturbed by monetary shocks.

I believe that the Fed contributes best to stability, through faithful representation of what the supply side seeks to accomplish. While the supply side can be notorious for contributing to gradual (long term) economic instability, central bankers remain responsible for maintaining monetary conditions for existing general equilibrium in the short and medium term.

So long as supply side conditions do not dramatically change, accurate representation on the part of central bankers (NGDPLT) can maintain stability for both monetary policy and real economic conditions. However, part of the present difficulty is fiscal overreach, in areas where the marketplace could benefit most from additional growth. As a result, too much time investment in knowledge product, has had little opportunity for practical application in the marketplace.

As it became more difficult to generate revenue (from traditional manufacture) for knowledge based services, governments resorted to increased consumer obligations (particularly asset formation), to make up the difference. Unfortunately, central bankers moved to tighten monetary conditions on those same asset formations, even as they moved to stabilize this source for banking interests. If alternate means for services and asset formation are not generated in the near future, long term growth will suffer. Too much knowledge based product is still defined on fiscal terms, which makes it difficult to completely escape the threat of the zero bound in the near future.

Even though central bankers could commit to a level nominal target, they need additional growth capacity - which means real assistance on supply side terms - in order to return to the earlier growth trajectory. Without that help, ongoing deflation is possible. Only remember the zero bound conditions of the Great Depression, and the fact nations can find it easier to resort to war with other nations, instead of "looking inward" to address the economic fallout which results from intractable non tradable sectors.

Long term deflation is always a possibility, when there is an insufficient degree of time aggregate value, to balance other forms of resource capacity. While negative interest rate territory could be a short term solution, the possibility remains that this form of economic maneuever may make little sense to populations as a whole. For long term growth, it is better to bring time value back into balance with other forms of resource value, in order to ensure economic stability.

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.

Needed: Greater Flexibility in Housing

Non tradable sectors include what can be considered core elements, in living and working environments. Economically and otherwise, rules for these areas of life often become more rigid than necessary. Granted, there are good reasons for standardization, in that commitments to routines in resource use generally pay off. Regular habits become culture over time, and lead to centuries long residual effects for land values as well.

Hence a general equilibrium may intensify societal norms, through both increased regulations and expectations. Regardless of one's actual abilities or economic access, asset designations may be formulated as though individual abilities don't vary, while family and charity are expected to make up for the difference. As it turns out, there are historical moments when this logic can backfire...

This appears as though one of those moments. Is it possible to scale back some of these excessive demands on the part of government and special interests? If there is to be real economic growth in the near future, something needs to shake up today's stodgy non tradable sectors. In particular, housing needs to adapt to the changing circumstance of the present. Who is ready to create a much needed housing market from scratch, instead of pretending that housing is still on the verge of overheating.

Granted, the solid nature of housing, reflects the solidity which is understandably sought as a backdrop to life in general. Most individuals with the income to do so, will continue to build traditional housing which requires a substantial degree of resources, well into the future. Even though he designed lightweight housing components during the course of his lifetime - for instance - Buckminster Fuller continued to live in traditional housing.

But there is only so much room in many prosperous regions for more traditional housing, and many of these citizens resist new apartment complexes as well. Part of the reluctance on the part of municipalities to make room for lower income levels, is the fact these individuals don't have as much to contribute, to the kinds of infrastructure that traditional development requires.

Fortunately, new communities can be established which make flexible ownership a central component of local opportunity - both for asset formation and infrastructure needs. In many instances, excellent designs which are strong and lightweight are already waiting to be put to good use in the marketplace. There is no reason why respectability can't be "built in", when new owners become part of the process of participation and mutual responsibility for the results.

Societies seem to suffer from a lack of imagination, when it comes to creating ownership options in more places through better means, for those with small incomes. For one, landlords scarcely benefit from low wage renters who aren't personally invested in their living quarters. Likewise, those same renters may suffer, if and when those landlords let their properties deteriorate. With some higher income exceptions, renting just doesn't have good incentives. Neither rentals or traditional housing constructs, are quite sufficient for present day housing needs.

Flexible ownership options could provide the incremental means which are needed by those with small wages, for gradual paths toward individual responsibility. One thing to consider, is that these densities will be somewhat different from present day city patterns. Often, knowledge use communities would likely include walkable areas near the core, with more traditional forms of transportation along the peripheries. Even though basic infrastructure patterns would be built into the environment, many of the building components would maintain a degree of mobility for changing ownership patterns.

Getting to Tradable

Among the first, basic questions a local corporation would ask: how can a given set of non tradable components become more tradable, so as to provide more producer/consumer options for all involved? In spite of wide variance between tradable and non tradable sectors, they intersect in ways which hold broader production potential than is sometimes realized. Non tradable sectors can become much more flexible and accessible, by incorporating elements that are normally associated with an innovative tradable sector.

Often, local corporations would not choose to directly compete with tradable sector institutions which already exist for traditional manufacture. The better part of tradable goods production doesn't need many (international) locations to provide sufficient product, for consumers as a whole. In recent decades, developing nations are also coming to terms with this circumstance. Indeed, a reassessment is needed, for populations to proceed in an increasingly knowledge based economy.

By no means does this imply that local corporations wouldn't have good production options. Rather, mass production would need to be utilized differently - particularly for building components and infrastructure. Even now, a wide array of tradable goods remain in the wholesale and retail environments of non tradable sectors. How might local corporations take advantage of future mass production potential, only as an integral part of local settings? Which communities would be well positioned to take on the challenge? These areas represent a starting point for investment and income generation, beyond the initial wealth generation of knowledge based services.

Local corporations could eventually compete with other regions to create experiential product, as well. The difference between this form of experiential good versus the directed efforts of - say - Disney, is that results would be gradual, from the spontaneous efforts of individuals acting in concert for common visions. Over time, the cumulative results of group endeavor would generate interest on the part of others. Knowledge use systems would maintain regular ties with other communities utilizing this structure. One benefit of this growing network is that local participants would gain broader travel options, than what now exists for those with small wages - particularly in the U.S.

An important aspect of getting to tradable, is the ability for groups (who are actively considering living/working in a given community), to define consumption patterns for the physical environment at the outset. Local corporations would have the advantage of combining tradable and non tradable sectors under one "roof", which means the benefits of lower overhead and costs accrue to the whole group. One benefit to this set up, is the fact these groups would not have to rely on taxation of assets in order to create services. As a result, greater flexibility in zoning, regulation, and consumption definition is possible.

However: in a long term sense, greater flexibility exists for services based options than for building component options. Once a given community adopts a formula for asset formation and infrastructure which works well, it would basically want to stick with that format. Fortunately, shifts in services provisions (with changing population demand), are easier than changing infrastructure and asset patterns - flexible though their physical layout may be. Hence a broader (more tradable) marketplace for lifestyle options would exist across a given network of local corporations (or knowledge use systems), while a broad services marketplace would exist within each node of the network.

One of the best immediate options for production potential, is more local food production than often exists outside of homes in small communities. Many regions remain hamstrung by present day regulations, which can restrict competition to a mere handful of restaurants in small towns. As a result, many will cook at home when they might have preferred to eat out. How many individuals do my readers know, who wanted to cook for the public, but were stymied by what was required? Restaurants and food service in general, are an excellent hybrid example of tradable/non tradable economic activity, which would immediately benefit from lower overhead in organizational patterns.

A marketplace for time value, would lend a tradable quality to services organization which otherwise hasn't been possible. Even before employment became threatened in services formation, both producers and consumers faced limited choice sets, in part because of the ways organizational capacity needed to be met. In knowledge use systems, time value does not need to conform to a single realm of possibility. Individuals and groups alike would be able to work at a pace which more closely reflects their capabilities and time availability.

For instance, those labeled as handicapped, disabled or otherwise, would gain opportunities for matching services based time with one another, when others don't have sufficient time to match services with them. One could think of this process as including multiple racetracks for ongoing economic endeavor, for tortoise and hare alike. Local education in particular, would make certain that more than one track remains open, so that one's personal time remains fully tradable through the course of a lifetime.

Environment, Economy and Property Rights: All are Important

Do environmental concerns outweigh economic concerns? Granted, there are important environmental considerations to be dealt with in the years ahead. Just the same, environmental factors are more closely connected to economic circumstance, than some are willing to consider.

In response to the Paris Climate Change Conference, Lars Christensen also makes an important point about Ronald Coase. When property rights are clearly delineated, individuals ultimately gain the ability to tend to the ecosystem in sustainable ways. Much of the damage to the environment, results from those whose economic access has otherwise been limited in some capacity. When survival is at stake, some groups end up wasting resources in part because they may have been denied more productive means, for economic and social interaction.

Contrary to what some now reason, property rights in the 21st century need more careful definition and clarification. Too many aspects of knowledge use, as the most important resource (or property) of the 21st century, were previously "staked out" by special interests. In turn, organizational capacity is forced to compete through technology and "dictates" in service product duplication, with ever smaller degrees of compensated time value. As a result, many are beginning to reason that countless numbers of individuals will not even be needed for future economic activity.

But nothing could be further from the truth, and over time this rationale slowly becomes a recipe for disaster in the real economy. The fact that knowledge use rights were granted to special interests, makes everyone else less certain, whether time based knowledge can still be utilized for social and economic purposes in normal circumstance. This has generated extensive negative externalities, and created a services market void which is impossible to accurately gauge. As to the importance of property rights, Ben Southwood recently wrote:

And in a society where property rights are clear and extensive, most substantial externalities will be priced in.

Few other measures have been so psychologically detrimental, as unnecessary limits to knowledge use in today's world. Individuals need knowledge use in property rights context, so as to manage and create value for personal and entrepreneurial time use. Until now, asymmetric compensation for time value, has made it difficult for anyone to thrive in an entrepreneurial capacity, in terms of knowledge based services potential. This is why a marketplace for (finite) time value is also needed, alongside the marketplace which represents infinite resource capacity.

Physical aspects of property rights are important as well. Citizens need better delineation of property rights in terms of lifestyle context, to create the physical environments they seek. For instance: instead of nations trying to force one another to reduce their greenhouse emissions, they could be encouraging their own citizens to build new locales for walkable communities. There are many means to do so, which include new infrastructure options for energy use, transportation, and more.

Instead, at least in the U.S., there have been multiple accounts of local governments attempting to stop citizens from living "off grid". Why would nations discourage their own citizens, in their personal efforts for voluntary cutbacks in energy use? Even as world leaders considered a "bottom up" approach for environmental issues of late, the real bottom up approach is that of giving citizens a greater role in the knowledge use and environmental delineation they choose.

The Real Test for Innovation

When something gets promoted as innovation, does it actually increase market size or availability for populations as a whole? After all, this is the primary test for innovation, and "access" isn't the same thing if the marketplace is essentially unchanged. Whereas if more of a marketplace becomes available to consumers in a real sense, what gets promoted as innovative action can be deemed accurate.

For instance, Obamacare as "improved" marketplace access was never real, because none of this frenzied organizational capacity ever increased the amount of time/knowledge based services product. There is no getting around the fact that increased demand (particularly for time based product) depends on increased supply, as well.

Innovation as concept, can be thought of in numerous ways. Whether or not a process proves innovative, also relies on other economic framing and circumstance which could potentially change the result. While many innovations result from internal technological processes, much depends on how organizational structures interact with one another, in the broader marketplace. Noah Smith wrote recently about the minimum wage as a form of innovation, in a long term sense:

...in the very long term, minimum wage laws might force companies to do what they otherwise wouldn't do--make risky bets on new technologies. And as workers raise their own skill levels, that new technology would raise their wages as well. The entire economy, including any workers who temporarily lost their low wage jobs, would benefit in the long run.

Granted, it's not difficult to imagine how this scenario plays out. Someone with reliable city access (through family, etc.) decides to go back to school, after a series of low skill jobs upon high school graduation. One could imagine local restaurants upgrading in ways which require less help, as contributing to the city dweller's decision. Some sorting along these lines toward higher skill work has indeed taken place. Just the same, asymmetric compensation is a polarizing factor, for time aggregates as a whole. As a result, some individuals may be tapped for a mere fraction of their skills potential - or possibly not at all, in areas which already suffer from a lack of economic complexity.

What of Noah Smith's tentative argument, for long term benefit from higher wages? Presently, more income at all levels is set aside for the necessities of non tradable sectors than was previously the case. This means higher wages will not have the same chance as before, to contribute to a tradable goods marketplace capable of providing further growth. Instead, income capacity is simply being shifted about in non tradable sectors, which are presently holding back production both in services formation and housing. For this reason, I would question higher wages - at least in the present - of providing sufficient contribution to marketplace capacity and growth.

When are firms inclined to innovate - i.e. generate more product for the marketplace than would otherwise exist? In the past, innovation has been most closely associated with tradable goods, which otherwise might not even be recognized as consumer options. Whereas for non tradable knowledge based services product, innovation for a particular product may appear completely new, but it nonetheless represents product which people expect on a regular basis. Until now, non tradable sectors have been less inclined to innovate for broader access, because of a ready made marketplace for their product under any circumstance.

Can non tradable sectors adapt, and begin the structural reforms which would contribute to marketplace growth and political stability? For a long time these sectors didn't have to, as tradable goods production provided the impetus for worldwide growth and prosperity. However, the time has come for entrenched interests to embark on production reforms, before political circumstance and monetary policy only become worse. Those who have the courage to do so, would be providing a service of value beyond measure. Innovation is always about a marketplace which provides greater access and more hope for the future. Otherwise, "innovation" is mostly about temporary profits, uncertainty and further instability.

When Does Inequality Present Problems?

James Pethokoukis noted recently that Angus Deaton had some thoughtful things to say about inequality. How much of inequality is a result of private and public interests which stand in the way of free market prosperity? Neither the political left or right are blameless in this regard. From Deaton's interview in the WSJ article:

Inequality is partly a marker of success. If someone thinks of something, some new innovation that benefits us all, and the market works properly, they get richly rewarded...[But what] I worry about is that some of the enormous riches we're seeing in the U.S. today are coming from the activities that are in social doubt. 

Regular readers are familiar with my concerns in this regard. Instead of a marketplace which represents a wide range of income potential, too many basic features have been defined on the "hostage taking" wealth capture terms of non tradable sectors. For a long time, "raising the bar" nonetheless meant more wealth for all concerned, which could explain why few questioned the process. Now, a growing number of individuals and institutions alike, struggle to meet what have become rigid terms of engagement.

Growth potential in this environment, is mostly limited to further options for high income levels - on the part of governments and private interests alike. But just as government infrastructure holds no multiplier capacity through choice for those who already have access options, the same is true of private investment which competes for an already saturated consumer base. Plenty of growth potential still exists, but it needs to be generated through broader means for access and economic engagement.

Economic stagnation, is little more than policy maker reluctance to define economic conditions on more inclusive terms. Unfortunately, too much discussion regarding inequality focuses on income differences, instead of the underlying factors which place too much consumption beyond the reach of lower income levels. One social media meme put it well: "Sorry, the lifestyle you were seeking is currently out of stock."

In other words, inequality presents problems when neither public or private interests are really paying attention, to segments of the marketplace which could benefit from further investment and labor force participation. While prosperous regions could still take in newcomers to some degree, nations need to focus on the regions which have been left behind, where internal solutions can ultimately be found.

Today's inequality is not so much about income differences, as the distortions in housing, healthcare and other service formation which are in need of resolution. As a result, non tradable sectors have become largely identified with status signals and struggles for access. Just as today's high bar is problematic for individuals, it negatively impacts new business formation, and hampers the ability of local governments to find sufficient revenue in struggling regions.

Angus Deaton reflected on a political aspect of inequality in the above linked interview, as well:

[Former Supreme Court Justice Louis] Brandeis said a long time ago that you can't have an extreme distribution of income and democracy at the same time.

Fortunately, there are ways to utilize knowledge that would sustain local democracies for service formation, when national redistribution can no longer do the job. This would not only make digital educational options worthwhile, but also provide means to disperse knowledge without the expense associated with general equilibrium. Otherwise, the lack of a marketplace for knowledge use, would leave little capacity for potential digital benefits in service production.

Inequality becomes problematic when people build rigid systems, and then force others out of those systems when the least deviation in aptitude or ability makes it difficult to remain connected. Hopefully, policy makers will focus on the domestic issues that matter most in the years ahead, instead of allowing present economic and political uncertainties to grow.

Sticky Wages in Price Taker vs. Price Maker Context

Often I get excited about concepts before I really have a chance to take a closer look, at what existing literature has to say. That's partly a result of feeling pressured for time (to learn and apply), since I was almost fifty years old before I finally allowed myself the luxury of studying economics on a regular basis. A recent challenge in this regard is the interaction of price taking and price making mechanisms in the economy. About price taking, InvestorWords has this to say, "An individual or company which is not influential enough to affect the price of an item." And, from Wikipedia, regarding price taking in "Market Power":

In perfectly competitive markets, market participants have no power.

How do we square this with the fact more competition is needed in a broader range of the marketplace...not less? Price making mechanisms are overtaking (good deflationary) price taking mechanisms to such a degree, they now impact monetary policy around the world. Does potential exist for a more inclusive, hence fully competitive price taking marketplace? It's somewhat of a tricky question, and one which also affects the sticky wages which can limit labor force participation.

In a recent post about macroeconomic frameworks, Nick Rowe noted the role of sticky wages, and the fact they contribute to coordination problems. For understandable reasons - given the nature of today's asymmetric wage compensation - he classifies labor as a single existing endowment. Indeed, this is often the case for expectations in high skills investment, given service formation in non tradable sectors.

The twentieth century saw a vast increase, in the ability of knowledge based careers to command price maker functions. This temporary increase was possible until only recently, given the degree to which higher education became associated with economic access. Just the same, existing revenue available for these positions is gradually becoming less certain. More of the faculty in the universities which remain viable, will need to make greater use of price taking wage structures.

However, there's still a problem for aggregate output and labor force participation, even though wages are gradually being adjusted downward. Even though universities and other knowledge based institutions have accounted for the revenue losses of recent recessions, addressing the sticky wage factor doesn't quite have the same effect, as what occurs in tradable sectors. Indeed, some element of implied knowledge use loss - and consequently time value - is involved. To some degree, the loss accrues across public and private sectors. This is why knowledge use systems need to position knowledge use in a sustainable price taker context - for both labor force participation and output potential.

Of course, government isn't really all that different from private interests, which encourage knowledge use limits to generate price maker income. Sticky wages from a price maker perspective, is as much about preserving marketplace power, as anything. But ultimately, price maker tactics backfire, in terms of marketplace competition and labor force participation. This is a reality which local corporations would (eventually) need to acknowledge, as they develop local patterns for economic viability.

My biggest concern regarding a base wage for mutual assistance, is the fact it has to exist on price taking terms. In other words, compensated wages would be less than currently defined minimum wages. Otherwise there would be too many pressures on knowledge use systems - both internally and externally. Internally: should groups attempt to adopt a price making wage (minimum wage or above), exclusionary rationale for some locals would be the quick result. And everyone would be right back to problematic unemployment.

Hence it is imperative to generate time/money investment and social security mechanisms which negate the need for price making wages. Likewise, should local corporations set wages too high, this would be externally counterproductive as a direct competition to general equilibrium. Why would specialists (from general equilibrium) provide their expertise to knowledge based systems...if those systems eventually plan to compete with them? The most important competition for alternative equilibrium rests in time value, so that one's personal preferences and skill sets have a chance to remain in balance over the course of a lifetime. In order to effectively break sticky wages in a long term sense, some trade-offs and backup plans are necessary.

One way to back the limited "power" of (fully competitive) local corporations, is to define economic environments with clear starting or base points for access and entry. By doing so, one's compensated wage would not present a constant struggle for access and participation, as has been the case for so long. Over and over, people gave up their desires to assist one another, to a marketplace of economic access which overcame entire realms of practical knowledge use. As a result, too many individuals eventually found themselves all but unable to reach out to others.

A marketplace for time value, would ensure that knowledge maintains "value in use" characteristics in a high skill, "value in exchange" economy. While price maker dynamics will always exist for high skill levels, a price taker marketplace for knowledge use would still go a long way, to restore normalcy.