Might Good Deflation Counter Excess Monetary Demand?

What makes good deflation so desirable? It all starts when increased output is possible with fewer resources overall. Once price reductions per unit come into play, they in turn lead to real wage gains and higher productivity levels. I believe that good deflation could become a services sector response to counteract high inflation and rising interest rates. Given the many positives of good deflation, what accounts for such resistance to its potential in housing and time based services?

Even though both areas must deal with the natural scarcities of time and place, much of the bias against good deflation potential is inadvertent and political in nature. Not only are such biases protectionist, they discourage adaptive evolution in time and place based product - evolution which could otherwise augment their capacity despite their natural limitations. While time based skill and land as real estate are certainly not exponential in nature, they could still add additional output through flexible coordination of knowledge and land use potential.

Bias characteristics also differ depending on the markets and sectors in question. For instance, progressives and conservatives increasingly prefer a restoration of local manufacturing over global free trade. Fortunately - even though this anti free market bias will increase manufacturing costs to some degree - globalized manufacture should continue benefiting nations in the foreseeable future. At the very least, it's reasonable to expect good deflation to ultimately be restored in global markets. Once tradable sector resource access is more stable and predictable, it should become more cost effective as well.  

Societies are fortunate indeed, that tradable sector activity is often managed for full production efficiencies. Still, during times of high inflation, we're reminded of the dangers of taking good deflation in tradable sectors for granted. Indeed, relying on the serendipity of long term good deflation (along with the more recent low inflation pattern) made it easy to disregard the long term inefficiencies of non tradable sectors. These inefficiencies remain in place due to countless quality requirements, many of which have been exacerbated by government subsidies. 

Recall however, that these requirements end up as ever more inputs in relation to aggregate output. Even when quality gains are worth additional costs for some, other groups suffer efficiency losses which in turn require additional personal labour for non discretionary needs. Consequently when it comes to quality of life, some income groups are actually moving backwards. Again, constant calls for higher wages occur because lower income groups need to work more hours than is sometimes feasible to meet their financial responsibilities.

Fortunately there are already better production methods which could establish disinflation in housing - methods which could eventually lead to good deflation as well. Just the same, a considerable amount of social and political bias has prevented the majority of flexible housing options. In this restrictive environment, progressives tend to focus on time based constraints for meeting financial obligations. Whereas conservatives are more concerned about place based constraints, such as immigrants who are seen as competing for already scarce housing. 

Despite the protectionism that stands in the way of production reform, housing is still a simpler issue to solve than markets based on time and personal skill. Hence countering excess monetary demand could begin with more flexible interpretations of housing for all income levels. Otherwise, many individuals will remain subject to the first mover problem of providing valuable services for others by more accessible means, only to be locked out of the housing necessary for this to happen. For that matter, one of the main reasons wages recently increased for the lowest income levels, is that employers were faced with the fact no housing existed nearby which their employees could afford. 

Societies need to focus on non tradable sector production issues, since they are at the heart of recent inflation which is proving difficult to eradicate. However, there's something else important about productivity expectations which needs to be noted here. When productivity involves final product which is independent of personal labour, these areas do have capacity for exponential output. Since our economic time is not exponential, it often demands a higher price as a fixed quantity. In these instances, people rely on investments in knowledge and skill to increase their time value. Alas, institutions then tend to respond by substituting away from time based input, in order to meet their financial obligations! Despite the obvious drawbacks of this effect, our current understanding of productivity gains makes it a rational approach, especially if institutional budgets are already in jeopardy. 

How, then, could good deflation be achieved in skills use without having to substitute away from time based input? One way is to make mutual time commitments, or time arbitrage, a valid and measurable economic unit. Skill sets would be voluntarily chosen and independent of monetary value. However, group effort would also utilize monetary compensation as a base to keep the process in motion. Time arbitrage might help societies maintain and preserve what they build and create, plus the knowledge and skills involved would be simultaneously measured as cumulative gains. Time as an economic unit of value is also one way to overcome the Baumol effect and ultimately, achieve good deflation in time based services. Again, production gains would transpire on completely different terms in these settings. Once housing production reform begins in earnest, economic validity for mutual time commitments would be the logical next step.

Polarization is a Problem for Progress in General

Today's lack of political good will is worrying enough, but it also comes with plenty of economic ramifications. For that matter, both NIMBYism and culture wars tend to reduce economic dynamism. Just as the "not in my backyard" mentality turned housing markets into major headaches, it even affects technological change such as transitioning to electric vehicular transportation. Many aspects of our lives and environments come down to what people of all political stripes don't want us to successfully engage in, as opposed to what could be accomplished.

In all of this, whatever happened to the hopes and dreams of centrist politicians and citizens? After all - even a decade earlier - moderates were still a meaningful part of public dialogue. While centrists occasionally held alternative views, they were often able to bring opposing parties to the table to get things done. 

Indeed, moderates have been important for societal progress up until recently. A relative few remain who still highlight economic progress and the benefits of growth. Unfortunately however, the majority of such gains became associated with prosperous citizens and regions rather than average citizens - let alone those with limited incomes.

If polarized landscapes weren't already dangerous enough, what might that mean for younger generations? Indeed, will they eventually become receptive to the idea of civil war? Don't forget also that younger generations aren't convinced of the future viability of Social Security in the U.S. Even though I hope Social Security continues to function as a glue for economic stability and common purpose, one can't be too certain. Should Social Security benefits be reduced in the near future, that might further destabilize political desires to remain united.

Polarization also represents a loss of what was once known as Third Way political thought. For instance, when I was much younger, Bill Clinton's presidency was associated with this line of reasoning. Alas, other than environmental protection, who still believes such rationale is relevant? From Wikipedia:

The Third Way supports the pursuit of greater egalitarianism in society through action to increase the distribution of skills, capabilities and productive endowments while rejecting income redistribution as the means to achieve this. It emphasises commitment to balanced budgets, providing equal opportunity which is combined with an emphasis on personal responsibility, the decentralisation of government power to the lowest level possible, encouragement and promotion of public-private partnerships, improving labour supply, investment in human development, preservation of social capital and protection of the environment.

Why was much of this abandoned? Part of the problem is how advanced education became a place for elite dialogue at the expense of economic dynamism. Meanwhile, active knowledge use - since it lacks any grassroots equivalency - is being confused with information and flawed logic mostly meant to circumvent action. Formal education is certainly not the place for increased distribution of skills and capabilities! Instead, the "gateway to the good life" hoards its limited slots according to what monetary compensation might amply reward. Worse, few policymakers remain willing to balance budgets, since abandoning financial restraint means squeezing a few more lucky participants onto the gravy train of human relevance. And decentralisation? The only decentralisation my state government is interested in, is the powers it can remove from both Washington and cities which might otherwise function better if they were allowed rights to do so. 

I continue to believe the best way to overcome polarization, is to create a knowledge based economy that can bypass the culture wars of educational access. However, while I remain guardedly optimistic, my hopes have radically diverged from what many once considered optimal paths for abundance and success. Is it still possible to use knowledge in more practical ways, instead of wielding it as the ultimate weapon for income divisions and urban rural divides? Perhaps we will find out soon enough. 

Excess Regulation Reduces Diversity and Inclusion

How might we respond to excessive regulation - much of which stands in the way of personal potential and greater inclusiveness? Clearly, there are regulations on the books which not only reduce our most basic life options, but are also detrimental to long term economic growth and dynamism. Once regulatory environments begin to overwhelm and economic stagnation sets in, societies pay the price in lost market opportunities and a generalized loss of willingness to continue sharing in commonly held goals.

Some of the worst offenders in regulatory excess, are those which impose arbitrary limits on our own growth potential. In a services dominant economy, that translates into tangible losses of mutual assistance and support. If we can't help one another economically, what options are really left? Or how could we possibly know, the extent to which output loss in valuable skills instead stems from a supposed lack of personal ambition? Consider the many hurdles that people are expected to overcome, before they can make a concerted effort to reach out to others on meaningful yet economic terms. Not all those regulatory hurdles in particular, were put there in good faith.

We have yet to begin the crucial task of making it simpler, for people to create real value from their own personal attributes. Meanwhile, societies are seemingly caught in fruitless and demoralizing arguments, where some insist various groups lack the fortitude or ability to do what is "necessary" to achieve success in life. 

Yet much of our inability to transition to a better functioning knowledge based economy, is due to regulatory hurdles. These complicated rules of engagement make it exceedingly difficult for many people to fully engage with others in meaningful ways. Is this the best we can hope to achieve as a society? How many burdens could we be rid of, if we sought to eliminate regulations which get in the way of active and meaningful participation with others? What if we could be of use to others, without the small fortunes so often needed for full time work in a knowledge based economy? 

Chances are, our collective human capital has been limited by arbitrary regulations to a greater extent than is realized. If we continue allowing only the "best and brightest" in basic workplace responsibilities, we might be doomed to a future where diversity and inclusion are all but impossible. Let's do our best to ensure this doesn't happen. It's time to get rid of the arbitrary regulations which not only create immense holes in our social fabric, but leave many citizens unable to fulfill their own personal aspirations.

When We Can't Always Get What We Want...

Somehow I find it fitting that Mick Jagger of Rolling Stones fame, studied economics before joining the group. Indeed, the song "You Can't Always Get What You Want", is an apt reminder how we seemingly forget to build vital need based markets. Yet if our domestic non tradable sector providers paid more attention to these areas, perhaps people would be less inclined to question the integrity of today's economic and political systems.

Granted, many producers face the temptation of raising the bar on product definitions where possible, so that product and services reflect consumer wants more closely than actual need. After all it can be quite profitable to do so. Unfortunately however, if too many non tradable sector producers choose this route, markets gradually become destabilized. What might be done? Again, cue what Mick Jagger and Keith Richards wrote:

But if you try sometimes you just might find

you get what you need

It's time to get serious about creating more accessible free markets in our non tradable sectors. We are confusing too many experiential wants with what is essentially necessary in order for citizens to thrive. For one thing, taxpayers face additional burdens, due to negative externalities caused by low income workers who lack sufficient income for even limited sets of non tradable sector costs. One indicator we have procrastinated too long in this regard, is that middle class citizens are beginning to seek "living" wages for non discretionary needs as well. Domestic protectionism might be out of control for instance, when a general lack of basic markets encourages politicians to mandate wage floors. And higher mandated wages only make it more difficult for employers to realize profits. We need to focus on production reform in markets where it matters most, to stop this destructive cycle.

Alas, even with fewer profits and businesses in operation, we can't always get what we want when it comes to "livable" wages for all employees. Yet today's workplace offerings are thought of as "meaningful" mostly when when abundant wages are part of the package. Perhaps it's not surprising that the most negative responses to my work thus far, have been due to my advocacy for good deflation in time based services income.

However, good deflation in time based services might be the only way to increase the use of workplace knowledge in more meaningful and accessible ways. Let's just admit it: Great wages are one of those societal wants which is impossible to fulfill for all citizens, via either fiscal means or private sector mandates. The sooner we face this reality, the sooner we can move towards a future of restored hope, as millions gain the right to inclusion in more productive organizational settings. For one thing, good deflation in time based services would do much more than simply address consumer "affordability". Good deflation in income and building requirements, would give us the legal and social grounds to share the work which people find most meaningful in life. 

One reason citizens expect so much from fiscal policy, is that governments are expected to be responsible for meeting many societal needs. The problem in this regard, is how governments and private interests raised regulatory and price bars on basic needs too many times. Each time these bars were raised, governments incrementally gave up their ability to influence or fiscally support citizens and economies, one unfortunate rule and regulation at a time. Now, many basic needs go unmet, as regulatory rules mostly accrue to the societal benefits (wants) of higher income levels. Among the sacrifices in this regard are the one time effectiveness of fiscal policy. Where once it held a valid role in addressing societal needs, now it is closely bound with specific political aims. 

Consider why this matters for inequality and applied knowledge preservation, as well. Fiscal policy now only holds a minor role in smoothing income differences. But more importantly, it is losing its ability to fulfill the role of spreading and supporting knowledge for the use of all citizens. To a large extent, these roles are diminished by the fact redistribution mostly augments the wants of specific high income groups. 

Which is also why I find it difficult to understand, the high hopes attached to fiscal policy "remedies" such as MMT. Even if political support for Modern Monetary Theory should turn into a policy option constant, what might its adherents hope to accomplish in any concrete sense? And that's not even considering the disparaging attacks MMT advocates tend to make on monetarist views. To me at least, Modern Monetary Theory advocates appear mostly concerned with middle class wants, rather than any need based structural issues faced by lower income levels. Granted, there is some good which can still be achieved via fiscal policy. However, we should let go of believing fiscal policy can actually address existing inequalities, let alone the productive use and preservation of knowledge in society. 

 

Hopefully, my readers won't get the impression I view wants as a societal negative. I absolutely believe that wants can be positive as well. However, let's be careful to ensure basic needs are actually met, first. What's more, do so without changing the goalposts so as to obscure basic needs once again. For instance, don't insist that smartphones or credit use are absolute necessities. I don't need either in order to thrive, plus opting for these things would reduce my spending capacity in other crucial respects. Indeed, once basic needs are met, and one finally gets to breathe easier, the occasional wants of a tradable sector (retail) splurge need not break the bank at all.

When societies forget what it actually takes for lower income levels to survive, they also lose track of the extent to which progress actually takes place for societies as a whole. At the very least, tradable sectors have given us excellent examples for full needs based markets, especially when luxury adaptations come from basic commodification structures. Whereas non tradable sector activity, due to the existing scarcities of time and space, tends to leapfrog need based offerings for what may appear as societal progress, but in certain respects is instead luxury mandates for low income levels which can ill afford such requirements. 

Profit is integral to businesses and sustainable economies in general, but profits should not be sought by needlessly obscuring the differences between want and need. Too much of society is presently paying the price for this approach. For one thing, it is a simpler matter to determine basic survival needs than some imagine. Once we become willing to highlight the real differences, innovations for our physical environments in particular, could proceed from this understanding.

Until we realize good deflation in time based services and building requirements, these areas of our lives will remain structurally fragile. As things currently stand, the domestic markets of our non tradable sectors demand too much in terms of debt levels and redistribution, for governments and citizens to successfully shoulder these burdens in the near future. Let's commit to innovation in need based markets. Even though societies can't fulfill every thing their hearts desire, we could still do a much better job of market creation which addresses actual needs.

Some Thoughts on the Political Transition

Despite temptations to remain focused on Trump's cultural divisiveness, we can't afford to lose sight of what has become a substantial economic divide. Is it possible to shift toward a more productive dialogue - one that addresses our long neglected structural dilemma? 

And consider how economic divisions have only grown since Trump's time in office. These issues will continue to impact our political differences if they aren't brought out into the open. Indeed, we need to explore broader perspectives for future wealth creation, while it remains fully possible to do so. From a recent Brookings article re the economic divide:

The data confirms that the election sharpened the striking geographic divide between red and blue America, instead of dispelling it.

Democrats and Republicans disagree on policy approaches, but they both tend to come up empty handed on action based structural approaches. Consequently, the passive aggressiveness of political gridlock rules the day. Even though political gridlock seems the safest option to some, it is a poor substitute for non tradable sector innovation, long term growth potential and economic dynamism. Worse, political gridlock means additional cultural battles, as Democrats and Republicans compete over high income work- especially for careers which include governmental redistribution. 

In all of this, it doesn't help that Republicans increasingly take a protectionist or zero sum approach towards wealth creation. For that matter, many Democrats are doing the same. Plus, some Republicans tend to discount the importance of knowledge based services which are structured as secondary or dependent markets. We recently witnessed evidence of this in Trump's disregard of physicians, due to their need to treat Covid-19 as an income generating source. Once we create organizational patterns for healthcare as originating wealth sources (via time reciprocity), these important activities will finally be independent of endless governmental posturing and the ticking time bombs of budgetary crisis.

Both Democrats and Republicans will need to recognize that in healing the economic divide, left behind regions (urban, rural and suburban alike) will need to approach resource utilization differently. Once supply side solutions are embraced which address the reality of small incomes, millions of citizens can start building more secure futures for themselves and their families. We can all breathe a sigh of collective relief, once broader sources of wealth creation and prosperity become possible. 

Even though we seek common ground with Democrats and Republicans, we still should not rely on their political backing to achieve better economic and social outcomes. It's time to get started on free market templates for new communities, so that political polarization and societal divisions might finally be eased. 

Could Production Rights Counter the Urge to Destroy?

One of the unsettling features of this recent election cycle, has been the oft stated desire to completely demolish the opposition. There's more at stake than belonging to the "wrong" team, since extremists on both sides tend towards a zero tolerance ideological approach. Even though some relief might be had from these cultural battles in the days ahead, how much "normalcy" is still feasible? Is the tribal urge to destroy only temporarily hidden from sight? 

By way of example,  a police chief in Arkansas resigned from his job, after promoting violence against Democrats on social media. Yet this is only a specific extreme example, in a broader backdrop of growing animosity towards "neoliberalism" in general. Indeed, reactions against various capitalist institutions took place decades earlier among the political left, and have since spread to others on the right. Consequently, the urge to destroy could remain an unsettling reality which continues to disrupt the benefits of globalization and an interconnected world. Even though - here in the U.S. - the presidential outcome provides a chance to catch our collective breath, this reprieve may nonetheless be short lived.

What can be done if populism continues to pose problems for wealth creation and economic stability? I can only hope that better defined production rights would ultimately counter the urge to destroy. After all, most individuals are naturally less inclined to tear down institutions and environments which have also been shaped by their own personal and financial commitments. Yet when we hear calls for greater responsibility on the part of all citizens, it's easy to forget, how domestic protectionist impulses limit the ways in which citizens are able to be personally responsible in any group context.

Hence one major challenge is ensuring that more citizens can fully participate in a modern economy. Too many now lack the economic freedom to fully contribute to their economic circumstance, meaning their personal realities often pay the price. When people have few opportunities to define the nature of their own environments, destruction all too often becomes the preferred response. It's time to build stronger supply side production options - options which can create more equality of opportunity and hope for a more inclusive future.

No one can reasonably expect politicians and policy makers to do the heavy lifting in this regard. Plus: Both Democrats and Republicans - despite their polarized differences - have been vested in forms of domestic protectionism which remain destructive for lower income levels. Is it any wonder this protectionism finally spilled out into the international arena?

Average citizens - especially those without college degrees -  are the ones who hold the greatest stake in the markets for services and physical infrastructure which now need to be encouraged. Fortunately, these new markets could be actively supported by economists and other professionals, who are starting to realize that millions can't support the fiscal and social responsibilities of a complex economy without active roles. Nor is it a simple matter to expect monetary redistribution from professional incomes for lower income levels, as was once the case via (a more dominant) tradable sector based revenue. Fortunately, time and knowledge can provide, what money is less prepared to accomplish in a services dominant economy. Let's extend better defined production rights to average citizens. By doing so, we might begin to bridge the chasms between prosperous and struggling regions which now stand in the way of peaceful democratic processes.

The Economic Freedoms We Still Need

Only in retrospect is it apparent how many economic freedoms we've lost - especially in recent decades. But how to respond, as special interests and legislators alike continue to place limits on our personal agency? 

In particular, consider how we seek to participate in the economy - not just as consumers, but as producers. As producers, we get the chance to experience economic freedom via active and meaningful roles with others. Consequently, the personal agency that derives from active use of skills potential, is more important for personal identity than is sometimes recognized. 

Our active participation in society is vital to innovation possibilities in both our physical and intellectual environments. However, realizing the potential of innovation, also requires that individuals keep a full range of production rights, so that such rights are not constantly diverted to preferred groups and associations. Not only do we need to protect permissions for personal management of physical resources, but also the necessary permissions which allow us to assist others through the use and application of knowledge. 

For that matter, our extent of personal freedom as producers and consumers, affects our ability to retain knowledge. In a recent study the authors discovered that people learn more readily when the relevant material is freely chosen. Despite the fact this education comes with a given bias, the bias framing lends greater meaning to the actions we choose. Indeed, according to the study, "the learning rates were slower in the forced-choice situation than they were in the free-choice one."

The economic freedoms that individuals need in their roles as producers and consumers, are crucial if societies expect to preserve a full range of economic access for all concerned. Production rights matter for ongoing activities which are practical and necessary, but also those which are aspirational and experiential. Perhaps one of the simplest ways to think about production rights is to consider a broader context in which economic freedom is possible. The simplest approach for me in this regard, is to envision how economic freedoms could contribute to the societal processes of maintenance, building, creating, understanding and healing. 

Maintenance is the foundation which supports all the others. From an economic standpoint, sometimes we struggle to maintain economic complexity, since maintenance activities in certain respects are the least compensated of the entire group. Yet even though some maintenance activities are basic in nature, they make it possible to sustain everything else, not only in terms of knowledge and information, but also our physical realities. When we lose crucial economic freedoms at a foundational level, our personal autonomy tends to be compromised in areas of higher levels of economic complexity as well. 

As lower level economic freedoms have been lost, so too society's ability to successfully engage in the higher activities of healing and mutual understanding. Only consider how activities in this regard could otherwise bring the actions of healing to a higher order in terms of positive societal intentions. Even our abilities to build and create are being blunted, and basic healing options are in disarray. In all of this: When people insist that intentions mostly lead to negative outcomes, only recall that intentions always begin at individual and personal levels, and they are both positive and negative in nature. It is only when positive intentions are disallowed, that the inevitable negative intentions societies also hold, come to the fore and gain the upper hand. We need to revive the positive intentions which can protect our economic freedoms, while there is still time to do so.

Globalization is Still Vitally Important

There are often unexpected similarities between conservatives and progressives. One in particular, are the growing numbers who no longer believe in globalization. Might they get their wish for considerable losses in this regard? If so, what might such a reality consist of?

For one, deglobalization would bring about sudden losses in overall wealth - losses that would doubtless prove devastating in unexpected ways. For instance, few would be prepared for the financial fallout that would occur. In the meantime, the COVID-19 pandemic continues to disrupt global networks which were already impacted by the trade wars. Recently, Kenneth Rogoff expressed his concerns about this circumstance, and I've highlighted a good portion of the relevant Project Syndicate article in this post:

Even if the United States turns a blind eye to deglobalization's effects on the rest of the world, it should remember that the current abundant demand for dollar assets depends heavily on the vast trade and financial system that some American politicians aim to shrink. If deglobalization goes too far, no country will be spared. 

Also from the introduction:

The post-pandemic world economy seems likely to be a far less globalized economy, with political leaders and publics rejecting openness in a matter unlike anything seen since the tariff wars and competitive devaluations of the 1930s. And the byproduct will be not just slower growth, but a significant fall in national incomes for all but perhaps the largest and most diversified economies.

He adds:

The US has more to lose from deglobalization than some of its politicians, on both the right and the left seem to realize...In particular, many of the benign factors that today allow the US government and American corporations to borrow vastly more than any other country are likely tied to the dollar's role at the center of the system. And a wide array of economic models show that as tariffs and trade frictions increase, financial globalization decreases at least proportionately. This not only implies a sharp fall in both multinationals' profits and stock-market wealth (which is probably fine with some), but could also mean a significant drop in foreign demand for US debt.

That would hardly be ideal at a time when the US needs to borrow massively in order to preserve social, economic, and political stability. Just as globalization has been a major driver of today's low inflation and interest rates, shifting the process into reverse could eventually push prices and rates in the other direction, especially given what appears to be a lasting adverse supply shock from COVID-19.

As Rogoff noted, globalization has especially been important for dollar assets. This globalization benefit helped build our strong services economy, and greatly increased income potential in the U.S. as well. Yet some among the wealthy may already realize, the extent to which their basic and augmented income sources could soon change. By way of example: Even as lower income levels restore earlier spending levels, the rich have not really begun to do so. Should they suspect long term income changes in the foreseeable future, there may be good reason. Even though the basic wealth of today's rich is largely correlated with human capital and national redistribution, globalized wealth contributed an additional layer to their income (via personal investments) which to some extent may be lost.

Nevertheless: Among the reasons globalization is now threatened, is that too many investment opportunities don't accrue to individuals who lack the base "requirement" of educationally enhanced human capital. And there are other important reasons why many citizens aren't impressed with the wealth of globalization. Chief among these, are the high costs of today's non tradable sectors - costs which particularly impact lower income levels. In all of this, many local economies still lack constructive ways to reach out to local citizens, after a decades long process of lost local manufacturing employment. Before many citizens become willing to embrace globalization, they would need new opportunities in economic participation - opportunities which are also linked with the resources of time, place, and community.

Should nations find the courage to recreate non tradable sector participation, the losses of globalization would not have to be so extensive. Production reforms could also provide means for nations to better manage their debt burdens. By not relying so heavily on debt for services generation, nations could lessen their chances of defaulting on earlier debt accumulation. Perhaps there is still time to restore confidence in globalization, by giving citizens the chance to recreate more abundant non tradable sector wealth, close to home.

Have We Lost Our Desire for Freedom?

And might economists be traveling a similar path? In an article for Cato, Pierre Lemieux reviews James Buchanan's What Should Economists Do?

Economists continue to be mainly interested in advising Leviathan on how it can manipulate people rather than how it can help people better achieve their desires, as Buchanan thought economists should do.

Perhaps the impulse to advise states instead, explains why economics sometimes becomes so political that its contributions to growth and prosperity are called into question. Lemiuex continues:

In America, both major political parties now seem to embrace government power as the only means of "running society" as opposed to spontaneous coordination through markets and individual liberty.

He notes how Buchanan feared that citizens preferred the state to make decisions on their behalf, in order to secure a stable outcome. Might we assume, then, the sacrifice of personal freedom as necessary for a life of relative tranquility?

Chances are, such a disheartening assumption isn't quite so simple. By way of example, most people I've known (including both sides of my family) are quite stubborn about giving up most levels of freedom, in terms of what they hope to gain for themselves! Plus, when governments do reduce freedoms, they tend to do so in ways that aren't clear about what's being further eroded - all the more so for lost production rights which generally morph into more professional ways of getting things done. In many instances, when citizens demand better outcomes in the form of economic access, they aren't exactly offering up their freedom as a sacrifice. And they may also be seeking amends for earlier losses in production means.

Further, the creation of artificial scarcities via professionalization of intellectual property, is how present day special interests assume and share greater authority with government. Given this reality, it is inaccurate to assume governments as the only ones with "parental" inclinations, considering the additional authority bestowed on private interests. When citizens lean excessively on government, they often do so because they believe their market options have been otherwise limited.

Recall as well, how governments set themselves up as mediators between private interests and the public, whenever private interests elect to limit their direct negotiations with citizens. Alas, that's the price special interests pay, when they demand further concessions from government for their benefit! Why would they assume they could somehow keep the resultant government meddling from happening on their turf? As it turns out, what is likely the citizen's innate desire for freedom, comes into conflict with the strong desire for economic freedom on the part of special interests. And when this process goes too far, some begin to assume "freedom for me but not for thee" means no meaningful freedom remains possible, hence become willing to proceed from this political assumption. Let's just hope we don't go there, for we are already too close in some respects. We see how other nations have already gone there before us and may do so again.

When special interests gain additional production rights, knowledge based artificial scarcities affect our freedom to choose as both producers and consumers. In Life is a Series of Presentations, Tony Jeary explains how imposed scarcities affect human decision making:

We are surrounded by advertising messages that promise certain deals "For a Limited Time Only" or "While Supplies Last"...Ironically, one of the main reasons we respond viscerally to these come-ons is that we cherish our freedom to choose. According to a field of study called reactance theory, writes Dr. Cialdini, "Wherever free choice is limited or threatened, the need to retain our freedoms makes us desire them (as well as the goods and services associated with them) significantly more than previously. So when increasing scarcity - or anything else - interferes with our prior access to some item, we will react against the the interference by wanting and trying to possess the item more than before."

Again we probably have not lost our desire for freedom. It could be more likely that nations lose freedoms through endless struggles to maintain them. When are special interests to blame? Is this a process set into motion when citizens lose too much of their ability to directly negotiate with special interests? What happens when citizens can't directly contribute to how market engagement takes place, or how markets are ultimately defined? Yet when citizens end up turning to government intervention instead, doing so often makes things worse. If special interest groups were more approachable, chances are citizens would not be as inclined to seek out governments as intermediaries, and governments might lose some of their paternalistic attributes.

Importantly, while governments tend to relish paternal roles just the same, their effectiveness in this regard will likely be reduced in the near future. It is becoming far more difficult to protect those who lack means to protect themselves, now that the bar for economic participation has been raised so many times by governments and private interests alike. Alas, governments have considerably damaged their own effectiveness, by making extensive agreements with private interests to control supply, even as they become indebted for the support of that supply. These losses in government and market effectiveness, only make authoritarian tendencies more dangerous.

What might these realities suggest for those who (still) believe in free markets? Since libertarians have had such limited success in the political arena, perhaps they might encourage economic settings where political concerns are put aside. Idealistic libertarians who have seemingly gotten nowhere in Washington, could contribute to local market generation which would be geared towards all participants, not just those who happen to have high incomes. When markets work for everyone (and yes, in the U.S. they were more efficient when I was young), there is less incentive for anyone to ask governments to intervene on a regular basis.

For that matter, opening useful markets which were previously shut off, closed down, or prevented from emerging for the first time, could once again encourage lower income levels to become more supportive of markets and free enterprise in general. These markets don't have to materialize in the prosperous regions of national stages where they pose problems for special interests. Nor need these market conditions become imposed on special interests, by authoritarians who are fed up with market limits which impact their own constituencies. They could be constructed in decentralized equilibrium by libertarians, instead.

It hasn't worked out well for economists or libertarians to get caught up in the cultural and political struggles of our day. And it's doubtful that many of us will be able to reduce authoritarian tendencies by engaging in the who gets what of cultural debates. Fortunately, there are still economic solutions that present better options for all concerned. Let's move forward once again, by ensuring that markets create real and useful choices for citizens of all income levels.

The Cost of the Conduits is Too High!

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

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

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

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

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

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

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

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

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

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

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

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

Does Price Making Lead to a Zero Sum Economy?

Normally, price making in aggregate should not lead to this result. However, price making may imply not just a lack of resource coordination among private firms, but also economic activity which benefits from taxpayer support. Ultimately, much depends on the relevant sectors.

Likewise, economic dynamism may be reversed when societies overreact to perceptions of "ill gotten" gains. Venezuela provides one of the strongest warnings of our time, as to what might occur when citizens and governments overreact to existing prosperity by breaking up firms. All too often, such intentional destruction does little to preserve markets, for the products supplied up to this point. There is danger in placing excessive blame on the dominant tech firms of our time. Should these firms be broken up, it could lead to the loss of valuable product, especially for those who lack sufficient access to other platforms for knowledge and information dispersal. Whatever weariness or disillusion society may have with social media, it would be far better to create new economic patterns and systems for face to face interaction, instead of holding social media accountable for problems which in many instances it only bears partial responsibility.

Why do so many believe we are living with a zero sum economy? For one, non tradable sector dominance tends to lack the level of output that occurs during periods of tradable sector dominance. Unfortunately, price making as a way to reimburse extensive overhead costs (in lieu of limited output), can negatively impact aggregate output if practiced to excess over long periods.

Of course, economists and others regularly remind us there is no such thing as a zero sum economy in the long term, in aggregate. One observer put it this way:

In a capitalistic economy, in aggregate, there will always be more winners than losers. This is because the economy is growing in the long run and both parties benefit from an exchange.

Let's keep the faith in long run positives as best we can, since the short run has plenty of uncertainty. Even small examples of protectionism and zero sum thinking can cause further problems. Recently, zero sum thinking on President Trump's part, prompted him to impose a 17.5% tariff on tomatoes from Mexico. Many of us in Texas have already faced rising prices on fresh tomatoes for months, as it has gradually become more difficult for deliveries to cross the border in timely fashion. And given the lengthy wait those truck drivers face, by no means are tomatoes the only fresh produce being affected.

Is the supposed "product dumping" on Mexico's part a form of price making? Even if it was, low prices for commodities such as these, lead to a positive sum circumstance. There's more fresh food consumption than would otherwise be the case for lower income levels, more income for growers and workers and also retailers. Affordable produce for all income levels means more economic dynamism, not to mention health benefits. Seriously, is anyone really being hurt by tomatoes from across the border? After all, many tomatoes grown commercially in the U.S. are already slated for canning and other processing, instead of grocery store produce sections.

The price making that causes a structural possibility of zero sum circumstance, is when price making occurs in ways which pose clear limits for supply side potential. All the more so, when the production processes correlate with product linked to space and time, which only sets up additional negative ripple effects. However, the best way to ensure as much economic dynamism as possible, is to respond to price making by ensuring that price taking is also possible in the same markets that already contain natural scarcities. In other words, continue to provide real economic options, instead of destroying what continues to function in the here and now.

After all, creative destruction is not due to purposeful destruction. It's about the potential for societies to make new choices, not just in terms of both consumption, but also production.The best way to make certain we don't end up with zero sum outcomes, is to always leave room for the full coordination and market enhancement of price taking. All the more so, when product and services are already subject to the natural scarcities of space and time.

Centralization, Economic Freedom, and the Skills Divide

To what extent could individuals still govern themselves, in contrast with how nations tend to be envisioned as "governing ourselves"? This question has become increasingly complex and important, as societies rely more than ever on knowledge to get things done.

Self governance was a simpler option for example, when property owners could still eke out a living from a productive plot of land. Whereas much of today's production involves high levels of knowledge and skill, not to mention levels of social coordination which go well beyond familial responsibilities. In a world economy increasingly dominated by knowledge and skill, does that mean it is no longer realistic to conceive of economic freedom as meaningful choice in interaction among individuals?

Too many time based services have been unnecessarily subjected to losses of economic freedom, via forms of external organizational control which reduce the possibility of meaningful interaction. But unlike many forms of final product, time based services tend to be experiential in nature, which often suggests they could be effectively managed and negotiated by the individuals who voluntarily choose to take part. Time based product is different from the specifications of tradable sector product, in that it often assumes snowflake forms. Indeed, this particularly holds true when we are young and still actively engaged in educational processes. Without real possibilities for mutual voluntary services association, people can end up experiencing difficulties establishing healthy boundaries, mutual respect, and trust as they go through their lives.

Over time, divisions of labour for time based services have become restricted in ways which not only inhibit total factor productivity, but also limit the nature of how providers and recipients could otherwise experience the personal exchange. Put simply, externally defined divisions of labour make more sense for the precise qualities needed in tradable product, than for the experiential nature of time based services. What's more, the non tradable sector divide in skills use potential, has been perpetuated by liberals and conservatives alike.

Perhaps these implicit agreements among professionals affect economic conditions in ways not always considered. Pierre Lemieux provides some interesting context in "Lessons and Challenges in The Limits to Liberty" where he takes a closer look at James Buchanan's Limits to Liberty (1975). For instance, Lemieux noted Buchanan's support of individualism in the latter's quote "each man counts for one, and that is that", and then continues:

It follows that individual liberty is a value and that the social system should be based on unanimous consent. Any limit to liberty must thus be consented to by each and every individual.

Alas, where do we observe this presumed liberty in action, given the lack of freedom so many now experience in the use of their own time, especially in relation to the time of others? If we do not believe that a diverse range of services could be freely chosen and provided, how can we really believe in free markets in the 21st century? How much of the present fiscal budgetary dilemma is due to our governments ensuring services markets remain as unfree as possible, on behalf of the interests they protect?

Not surprisingly, it turns out there are limits to the freedoms which James Buchanan believed to be possible. For one, Lemieux emphasized how Buchanan argued in favour of government provision for public goods as a social or constitutional contract. Yet what's different in this instance, is Buchanan's reasoning for doing so. As it turns out, his beliefs regarding personal aptitude and ability also factor into his proposed economic outcomes.

In contrast to other contractarian theorists, Buchanan does not assume equality in terms of resource utilization or personal capabilities. From this it follows that some minimum of welfare state may therefore be necessary. Private and public goods both depend in part on the rules of the economic game, whereby freedom is mostly agreeing to take part in what is already proposed, or refusing to do so. It's easy to imagine that sometimes the state needs to intervene when people refuse. Doing so costs money. Hence this quote from Buchanan:

The dividing line between private and public goods depends, in part, on how the property rights of persons are defined.

The twentieth century gave rise to many domestic forms of applied knowledge protectionism, long before the tradable sector protectionism which arose more recently. Essentially, knowledge and skill has also been made rival in non tradable sector circumstance, in part because protected knowledge has to do the heavy lifting of meeting the organizational costs of quality product and costly real estate. And with the giving to special interests of these exclusive production rights, comes the rationale for a welfare state as well. Hence conservatives and progressive alike, would tend to view welfare as means to reduce public rebellion or even revolution. Indeed, I recall an instance among friends in a local welfare office decades earlier, where local progressives expressed the rationale of public assistance exactly in these terms.

Again, Buchanan is hardly alone in assuming relatively permanent differences in aptitude and human potential at the outset. After all, many progressive arguments for government job guarantees or some form of "living" wage, contain the same underlying assumptions regarding how workplace conditions and skills requirements "should" consequently be defined. Nevertheless these assumptions blatantly disregard the potential for mutual reciprocity and well being, when societies allow as many as possible to pursue full engagement and meaningful interaction.

A limited welfare state is desirable for societies to protect the old and the weak. That said, there are millions who actively resist remaining weak. Some of the latter I might either respect or fear. But I don't find welfare states acceptable on the rationale of keeping out those who could potentially thrive but presumed too dumb or weak for society to allow to take part. Social and economic exclusion is not going to work in a knowledge based economy, especially when many forms of production and former employment are tended to by technology and automation. Let's don't create permanent skills divides between groups. That's a recipe for disaster. Doing so would not only prevent millions from assisting one another, but also incline some among these groups to rebel in a thousand ways that no government can prevent.

Living Wage, or a Functional (Real) Wage?

Interestingly enough, one can think of mercantilist arguments - while still irrational from the standpoint of international trade - as political efforts to ensure a supply side version of a "living" wage, in the form of manufacturing jobs at home. Yet protectionism such as this misses the mark, since automation is responsible for far more lost manufacturing employment, than globalism. Paradoxically, however, technology and automation contributed to manufacturing output so much that - for a long time - they included higher levels of compensation for low skill workers, than what many service sector jobs can provide. Alas, service sector jobs, and their time based output constraints (which negatively impact nominal wage potential), have partially replaced the low skill manufacturing employment options of our recent past.

Of course, who doesn't want wages which cover basic expenses and costs of living? Once anyone experiences life on these terms; understandably, it can be difficult to imagine, or adjust to, other forms of existence. Even though progressives are more likely to advocate for living wage proposals from a nominal standpoint (which would increase service sector wages as well), there's some unexpected crossover of wishful thinking between these groups, regarding supply side versus nominal wage arguments.

As nations are faced with growing debts and revenue obligations, both protectionism and living wage arguments may appear as though a panacea. How does a government tax low skill income which is scarcely high enough to generate further revenue? Especially if that government already faces restrictions on the taxation of high skill income?

Yet both approaches are at best, little more than shifts in general equilibrium conditions, instead of general equilibrium improvements. In a recent CapX article, Tim Worstall decried the faulty rationale on the part of the Trades' Union Congress to create a million new manufacture jobs. While Worstall's reasoning is sound when he claims "More jobs in manufacturing is a terrible ambition for the British government", he nonetheless falls short with his first assertion:

The ultimate economic goal is not to create new jobs, but to destroy them.

How so? It's not the first time Worstall has made this claim. A brief digression might help. His argument has relevance for total factor productivity gains during periods of tradable sector dominance. Additional output gains in these conditions, can translate into more enterprise generating additional employment in new capacities. At the same time, these production gains benefit from decreasing internal labour hour requirements in the relevant "old" firms. The problem? Once non tradable sector dominance sets in, the earlier advantageous framework of tradable sector output gains becomes less certain, since more revenue in aggregate is being slated for non discretionary costs and non tradable sector requirements. Sectoral revenue imbalance means that employment opportunities become more responsive to political and financial realities, rather than fortuitous changes in general equilibrium output.

Present day non tradable sector dominance, is also a factor in the limited effectiveness of a living wage, insofar as its capacity for meeting societal expectation. Plus, higher minimum wage requirements increase workplace expectations and place a higher floor on employment opportunities. Perhaps what is needed, is the concept of a functional wage which serves to augment productivity options on the part of each economic participant. Such options would ultimately increase the value of a wage at a real level, instead of at a nominal level.

Nominal wage constructs tend to function as a passive response to general equilibrium conditions. One could envision a functional wage (compensation for personal time priorities as mass market commodity) as a more active approach. Rather than merely accepting the limits of a given wage, participants could ask: How might I alter, innovate or otherwise shift my local resource capacity so as to improve equilibrium conditions? Is it possible to place my wage capacity into the larger framework of total resource capacity and potential?

Granted, local rules and regulations in normal circumstance, greatly limit the degree to which such an approach is possible. However, in economic settings where the time value of local groups is compensated as a commodity (which allows everyone to take part in time based coordination), compensation for time would be functional in the sense that all would strive for gains in real wage capacity.

Until now, innovation has been possible in fits and starts, and mostly applied - despite loud complaints - wherever it was possible to do so. It is feasible to apply extensive innovation to both our services capacity and our physical environments. Even though individual participants would also be seeking gains for their own ends, they would (once again) often be able to do so in ways which expand general equilibrium potential.

For those willing to take part, ongoing innovation in a time/space continuum, could transform real wage capacity beyond present day horizons. The compounding interest of knowledge and skill in this continuum, could ultimately defuse the time constraint of services based output in many ways. While nominal wages of time arbitrage would appear quite minimal in contrast with present day minimum wage requirements, real wage gains could still outpace what a living wage could provide in many traditional economic settings. Despite the fact we have limited options for improving nominal wages, the potential for improving real wages via production reform is so vast, it boggles the imagination.

Can Our Non Tradable Sectors Embrace Free Markets?

Why do governments and citizens alike, increasingly act as though we live in a zero sum world? After reading Alberto Mingardi's post "A political realignment in Europe?", I wondered whether I'd spent enough time emphasizing the connections between high levels of protectionism in non tradable sectors, and the shift towards identity based political alignments.

We are beginning to witness the results of what has been excess protectionism at home in recent decades, at a global level. Is it still possible to reverse these non tradable sector inclinations? The supply side limits of these market constructs have created intense identity struggles across an entire spectrum of marginalization. More direct forms of wealth creation in our non tradable sectors, could make it possible to preserve the economic dynamism which brought so many quality of life gains for populations across the globe. In all of this, my concerns are similar to those of Mingardi who writes:

I find the scenario of a realignment around cultural issues potentially terrifying. It seems that the advocates of a closed society have an advantage in forging an alliance with advocates of a closed economy: they tend to be highly ideological and, thus, committed. On the other hand with the exception of libertarians, the preference for a free economy is rather "weak"...with the exception of libertarians, how easy is it for people that care about civil rights to forge an alliance with those who want a freer economy? 

Indeed, some of the focus on redistribution is also about the desire for retribution. He concludes:

The old political allegiances were confused and incoherent for a reason: it is very difficult to develop coherent ones.

Is it possible to become more free in the use of knowledge and property ownership options which could accrue to the benefit of all? Should non tradable sectors become more willing to embrace free markets, they could play a considerable role in reducing the political struggle over redistribution which now threatens to unravel economic stability. Let's hope today's levels of wealth creation don't come unraveled by the excess inclinations of wealth capture and redistribution. Even though they are in need of a more inclusive and dynamic organizational approach, non tradable sectors have the capacity to contribute to future prosperity, much as tradable sectors have already made possible.

Does Price Taking "Deserve" Production Rights?

Symmetric matching of mutually held work priorities, is also a price taking process for the economic time which individuals and groups actually have at their disposal. Yet it would be difficult to spontaneously coordinate a wide range of services generation as a measurable production constant, without production rights for the use of knowledge.

The fact many of our institutions hoard knowledge, is a costly process that withholds productive activity and economic vitality from the marketplace. It's not so much that price taking (instead of price making) would mean participating individuals "deserve" production rights, but the fact that a relative production constant for services generation wouldn't be possible, otherwise. If information "wants to be free", there are certainly valid economic reasons. For instance, as Scott Sumner wrote in "Let's Transfer More Technology to China":

The beauty of information is that use by one person does not preclude use by others.

Why, then, do societies too often pretend it's not possible to allow the use of knowledge to take place on such terms? Even though knowledge hoarding seemed to be more a domestic issue in the latter part of the 20th century; increasingly, the protectionist impulse is (yet again) beginning to rear its ugly head at the global level.

In a recent post, I suggested that a new form of institution could potentially adhere to a price taking promise, which might ultimately make time value a more representative component of monetary policy. Fortunately, it's still possible to restore the benefits of price taking as an organizational standard - much as what existed in recent centuries of tradable sector dynamism. When institutions are willing to accept prices which coordinate existing resource capacity among multiple providers, societies remain able to get things done without extensive debt, and the costs of doing business also remains within reach of the average citizen. Whereas price making - when carried too far - is notorious not just for the economic exclusion which can lead to massive societal inequality, but also extensive political risk.

Given present day general equilibrium expectations, it's not always a simple matter to be a price taker, especially when the majority prefer to be price makers. Still, equilibrium corporation settings could make price taking a viable option for those who participate, by coordinating as many non tradable sector factors as possible in locally defined equilibrium settings. It's possible to agree to meaningful work at a standard low wage, when others have done the same in ways which mutually sustain and otherwise reinforce the group for having done so.

At the very least, such a system could provide an apt example, how non tradable sector markets might come within reach of a broader range of income levels. Individuals and nations alike have become burdened by the costs of getting many basic things done - a burden which is entrenched in government budgets as well. Price making, while an understandable reaction to high costs of doing business, is nonetheless a reflexive response which only makes the societal burden more extensive. With a little luck, more production rights and more price taking in general, could eventually create more affordable outcomes for all concerned.

When Governments Enforce Limits to Growth

Why is it so difficult to understand, how protectionism and favoritism can negatively impact economic outcomes? Nevertheless, the latest example is obvious to observers far and wide, at least beyond the confines of the White House. Which makes it all the more frustrating, that 10 percent tariffs on imported aluminum and 25 percent on imported steel, will actually be implemented. As Gregory Mankiw noted, Trump even managed to unite a polarized country: "How often do Jeffrey Sachs and the Wall Street Journal agree?" And Mickey Levy of E21 wrote:

The economic effects of these tariffs on the macroeconomic environment will depend critically on whether they damage business and household confidence...the danger is if these tariffs adversely jar confidence - perhaps fueled by foreign retaliation - heightened uncertainties would lead businesses to tone back their expansion plans and the trajectory of consumer spending would be softer.

Supposedly the tariffs would be "helpful" for reasons of national security. But where do the majority of these imports come from? James Pethokoukis explains:

That reasoning is pretty much ridiculous, unless the Pentagon has given Trump reason to think it's possible that the 1st Armored Division might one day be racing toward Toronto, or Army Rangers parachuting into Rio de Janeiro. The top two suppliers of steel imports to the U.S. are Canada and Brazil.

He adds, in spite of a report from the Commerce Department that metals imports eroded weapon making ability, the Defense Department only needs 3 percent of total U.S. steel, or 70% of the U.S. market. And the economic argument is at least as bad, since Trump is possibly hurting the many, just to help the few, by increasing the price of "commodities used to make a vast array of products for businesses and consumers."

According to Politico, Trump's tariff decision spurred retaliatory threats from close allies as well. Both Australia and China expressed concerns that other countries would follow the U.S. lead, and retaliate. Indeed, the EU could target $3.5 billion of U.S. imports at the outset.

It's astonishing no one could convince Donald Trump that tariffs are generally a bad deal for everyone concerned, instead of making a stronger economy more likely. Of course, other limits to growth due to political favoritism have been in place for well over a century - even if these limits don't have obvious implications re employment outcomes. Presently, the degree to which knowledge use limits affect employment potential, no one really knows.

Washington's focus on supposedly retrievable twentieth century jobs is off the mark. Especially since technology and automation impel us to reconsider, what work and wealth creation in the 21st century is all about. However, it's difficult to start a dialogue about this reality, when existing wealth is being jeopardized by an insistent focus on the past. Hopefully in the years to come, this unfortunate circumstance can be changed.

Musings on "Free Market" Healthcare

Even though it's difficult to imagine today, healthcare in the U.S. prior to the twentieth century, once resembled a free market for the use of one's skills. Before extensive formal educational requirements were put in place, rural areas were still more likely to have practitioners as well.

Much has changed. In a post for the Mises Institute, "Do We Have a Free-Market Medical System"? Hunter Lewis notes that for some observers, profit based healthcare "should be outlawed", while others are upset that healthcare is "socialized". How to think about this? He writes:

So what do we have? I think the most apt description would be "crony capitalist" medicine, one in which powerful special interests conspire with government officials to create legally mandated monopolies, with the specific goal of thwarting free market competition...There are many honest and dedicated medical professionals sincerely devoted to the healing arts. But they are trapped in a system that can more accurately be described as a crony capitalist nightmare.

Granted, while healthcare in the U.S. is hardly the result of a vast conspiracy theory, crony capitalist medicine does describe a relative default position, for knowledge use protectionism. This approach has undermined legislation time and again, which possibly could have made the system more accessible and efficient.

Nevertheless, physicians have lost some of their hard won autonomy in recent decades. The added healthcare value they worked diligently to create, is now shared by hospitals, insurance and pharmaceutical companies. However, at a macroeconomic level, a symbolic focus on physicians remains relevant, for their earlier twentieth century successes have shifted the relative value of other human capital representation downward somewhat, in general equilibrium.

How so? Physicians increasingly expressed a preference for a customer base which was only partially representative of general equilibrium. In other words, they increasingly catered to clientele who were the most advantageous to serve. Through a focus on wealthier patients, physicians were ultimately able to raise the status of healthcare to that a respectable profession, on a par with other highly skilled professions.

For physicians in the U.S. healthcare is still largely a free market, in the sense that many physicians remain free to choose both their patients and the services they wish to provide. The problem of course is that this circumstance is one sided, since too many rights to the use of practical knowledge are now limited. Consequently, here's where any semblance of a free market for healthcare starts to break down, for citizens lack means to pursue healthcare options outside the services of today's physicians. Production rights need to be restored so that citizens can once again improve their lot through their own efforts, which is all the more important when they lack the monetary means to reimburse skills which require high levels of investment and sacrifice.

Again, physician discrimination for the use of one's scarce time, is understandable. That's a form of discrimination which - given the scarce reality of our time - all of us have little choice but to employ. Just the same, we need to extend that freedom of our time preferences both ways. In particular, it would be cruel for the physician to discriminate, if he or she does so in ways that deny others the ability to help themselves, especially when no one else can reasonably be expected to come to their aid. First, let's do no more harm. Why not think twice, before we needlessly tie the hands of those who otherwise might discover not only means to help themselves, but also others as well.

Could Theoretical Economics Benefit Political Dialogue?

Perhaps a good theoretical discussion is needed: One which takes a closer look, at how today's service sector dominance affects macroeconomic outcomes. After all, the last significant theoretical debates, took place while tradable sector activity was still dominant, and much has changed since then.

For decades, theoretical economics has taken a back seat to empirical economics. While this is understandable in many respects, empirical work lacks the broader framing which could help citizens rediscover a common ground for the challenges of the 21st century. Small wonder that citizens are losing trust in their governmental institutions, as policy makers and others have too much incentive to further polarize their constituents, instead.

Even though economics as a discipline was severely questioned during the Great Recession, little was changed, and no real broader understandings were reached. But if corporate entities and economic thought in general are doing "just fine", why, then, is politics the world over in such turmoil? Why such a dramatic disconnect between political and corporate realities?

In a recent Bloomberg post, Tyler Cowen questioned why so many political problems exist, given the fact corporate America is quite healthy. He reasons that even though politics is weird, the fact that business firms are functioning normally, means there should be little cause for concern. Oddly, his post made me think of numerous posts from Noah Smith, who insists that theoretical economics is no longer important. Nevertheless, monetary policy is one of our best indicators that something is wrong, as central bankers move ever closer to a deflationary era. Without current takes on theoretical thought, we scarcely have means to describe what we are witnessing.

Meanwhile, much of the national discussion is too disjointed, to deal effectively with rapidly changing equilibrium conditions. What's more, the economic dialogue which is more theoretical than empirical, is largely focused on the nature of equilibrium expectations before they became dominated by service sector activity.

To be sure, a similar set of outdated expectations is true of Keynesian thought. Only consider how fiscal stimulus was once more effective, before non tradable sector dominance meant diminishing returns for this approach. When Keynesian thought gained prominence in the twentieth century, tradable sector activity was still dominant, which meant government redistribution had a much greater likelihood of contributing - albeit indirectly - to increased marketplace output. Before non tradabable sector requirements became so extensive, basic living costs left more discretionary income for all income levels.

Hence those 20th century multiplier effects once contributed to thriving Main Streets, even in small towns. Whether or not Baby Boomers "spent too much" in those earlier times - as some now believe - isn't quite the issue. A "good time out" could be had by frugal shoppers, as well. Indeed, most shopping was a minimal expense, compared with the non tradable sector requirements of the present. Little about the "marketplace" of the latter could be considered fun, right now.

How to think about these changes, which have unfortunately meant diminishing returns for fiscal stimulus? Again, consider how distribution patterns for tradable sector product, contrast with those of non tradable sector product. Non only is non tradable sector activity (still) dependent on the direct wealth formation of tradable sector activity, it has limited incentive for marketplace expansion, since its producers and consumers are both time and place dependent. In other words: unlike tradable sector product which is produced and consumed with little regard to time and place restraints, marketplace expansion for non tradable sector product, can mean diluted profits.

Given this instance, higher costs are sometimes understandable. The problem is that when fiscal policy addresses high costs through subsidies for non tradable sector activity, the natural limits of time and place only encourage costs to continue in the same direction. Whereas 20th century government fiscal policies once contributed to tradable sector markets which could ready expand without losses in profits. Consequently, cutting costs was not illogical for tradable sector self preservation.

Wait: If tradable sector activity is being crowded by non tradable sector dominance, why does business activity appears as though normal and flourishing? Tradable sector activity is thriving because of global production and consumption. These firms remain successful in spite of a limited marketplace "at home" in advanced economies, because of growing levels of discretionary income in developing economies, even as discretionary income is still being lost at home.

And even though it is understood that government subsidies can make tradable sectors lose their competitive edge in a global environment, non tradable sectors - with their local customers who may have few other choices - again, don't have the same incentive for innovation. Consequently, low productivity can be seen as both a cause (non tradable sectors), and a result, when tradable sectors are compelled to reduce production at home, due to the income crowding of non tradable sectors.

Protectionism begins at home, and it is the protectionism of non tradable sector activity, which could ultimately affect tradable sector activity across the globe. Hopefully, citizens will gain a better understanding of what is at stake, before the effects of a tight money and protectionist environment, spread too far. Let's take a closer look at economic issues in a broader light.

The Lifestyle Illusion of Working Capital Requirements

How might one contrast the productivity gains of fixed capital, with the expectations and requirements for personal time as working capital? Prior to the Industrial Revolution, working capital was far more widespread than fixed capital. Consequently, populations expended tremendous efforts, for levels of aggregate output that were not always enough for survival.

Even though widespread abundance is now taken for granted (since the Industrial Revolution), extensive requirements for personal working capital, are beginning to eat into the gains made possible in recent centuries through fixed capital. While these shifting ratios may not be obvious at high income levels, lower income levels - in spite of post Industrial Revolution abundance - face working human capital requirements which - once again - don't always take care of basic needs.

What this boils down to, are ratios of aggregate input, in relation to aggregate output. Remember that time based product includes human capital as both input and output. Product formation for the latter - due to intangible quantification - also makes extensive hidden demands on output. Even though automation ultimately strikes at the heart of skills based requirement expectations, automation cannot address the necessity of maintaining humanity as integral to supply and demand processes.

As luck would have it, automation versus time based economic effort, is a decision making process which populations will need to address via their own unique sets of terms. Whether or not we can experience gains in productivity in the near future, comes down to all of us. Otherwise, time based product - in times of economic stagnation - could claim such so much revenue in the form of required input, that lower income levels lose the ability to successfully coordinate for services, via the monetary representation of other existing output.

Input requirements for human capital investment, lead to substantial lifestyle illusion. This, in turn limits both discretionary time and income for broad swathes of the population. While reading the first edition of "Before the Industrial Revolution: European Society and Economy, 1000-1700", by Carlo M. Cipolla, I've thought about the relationships between fixed/working capital and aggregate input/output. He has an interesting perspective on economic processes which encouraged me to consider various contexts for fixed and working capital in macro/micro settings. How might fixed capital reduce the need for time or resource capacity? Cipolla writes:

Fixed capital consists of those economic goods produced by man which are repeatedly used in the course of a number of productive cycles.

While technological innovation quickly comes to mind, Cipolla stresses that technology is not the only form of fixed capital, and I would also add that time replication patterns have the capacity to contribute to output gains. He discusses how prior to the Industrial Revolution, the greater abundance of working capital in relation to fixed capital, accounted for the fact that no matter how hard people worked, they struggled to meet even basic consumption needs. As the British economist John Hicks also noted, it was when fixed capital assumed a central position in production "that the revolution occurs". Finally, progress spread far and wide, once societies gained enough confidence in fixed capital constructs, to stabilize and increase output gains.

Despite the tremendous gains of the Industrial Revolution, we have inadvertently lost some of that additional capacity, by requiring ever larger components of working human capital (in relation to fixed aspects of human capital) for time based services production. Consequently, for a substantial part of the population, many of the forward steps of progress via tradable sector production, have been followed by the backward protectionism of our non tradable sectors. Not only have these sectors required unnecessary working capital in services generation, but also in multiple aspects of building and infrastructure requirements.

Without a marketplace for time value, the working capital costs of time based services product, could eventually limit time based services to higher income levels. Lest anyone hasn't noticed, services generation for middle income levels has been counted one of the greater achievements of our age. How would policy makers and economists successfully defend free markets, should this capacity be lost?

It's time to include human capital as a fixed capital component in relation to working capital, so that low income levels are not overcome by working capital requirements which in some ways resemble those of earlier eras. I believe that time arbitrage could provide a useful form of fixed capital. As applied human capital, service generation would finally be recognizable as a tangible good. Best, this version of fixed capital would allow knowledge application to occur within a broader economic context.

Secondary Market Limits Can Affect Solow Residual Limits

Specifically, secondary markets for which time value is an important component of final product. Even though this form of organizational capacity continues to generate employment, its methods are less certain - or reliable - than those of primary markets. Whenever primary market and tradable sector activity are dominant, the productivity gains of the Solow Residual are more obvious. Meanwhile, total factor productivity has stalled, as the limits of secondary markets affect total output and capacity. From Wikipedia re the Solow Residual:

The Solow Residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow defined rising productivity as rising output with constant capital and labor input. It is a "residual" because it is the part of growth that cannot be explained through capital accumulation or increased labor...The Solow Residual is procyclical and is sometimes called the rate of growth of total factor productivity.

When secondary market formation is confronted by economic stagnation, one result is a reversal of a previously "virtuous" cycle of increased labor force participation, as contributing to manufacturing demand. So long as economies maintain solid growth trajectories, secondary market formation and primary market formation are able to reinforce one another in this process. What's more, until the Great Recession, many believed that secondary markets would be able to substitute for primary markets, if and when the latter didn't provide sufficient employment.

Now that the organizational capacity of secondary markets is facing limits, a new form of organizational structure is needed, so as to restore first mover market positions for long term growth. Unfortunately, knowledge use as the obvious candidate, is still trapped within a limited framework of secondary market terms of engagement. Consequently, a lack of first mover organizational capacity, means governments increasingly resort to long outdated mercantile strategies, as a response to economic stagnation.

No longer are secondary markets for time based product, the employment panacea they might have appeared, scarcely more than a decade ago. As it turns out, the secondary markets of time based product - as a second mover - have been revenue dependent. Hence when this form of organizational capacity seeks greater efficiency via a Solow Residual process, the result is often lost supply and demand of time based product, instead of the productivity gains which normally accrue to the cumulative labor reductions of (total) tradable sector output.

What isn't always evident is that lost supply and demand for time based product also translates into lost productivity. This is all the more important, given the fact tradable sector consumption has also been limited by falling labor force participation. However, a first mover position for knowledge and time based product, requires a different organizational response than what has transpired thus far - one that reinforces the Solow Residual of tradable sector wealth, instead of detracting from its benefits.

Meanwhile, as Arnold Kling noted in a recent entry for the Concise Encyclopedia of Economics:

For most people, viewing trade as a rivalry is as instinctive as rooting for their national team in Olympic basketball. To economists, Olympic basketball is not an appropriate analogy for international trade. Instead, we see international trade as analogous to a production technique. Opening up to trade is equivalent to adopting a more efficient technology.

What's important now, is a recognition how rivalry for knowledge use has decreased the work availability that many individuals have sought and prepared for, in the marketplace. Otherwise, populations might not be so inclined to disregard centuries of progress, via the mutual gains from international trade.

Consider Arnold Kling's assertion above, that opening up to trade means adopting more efficient technology. Before anyone can remain comfortable with the efficiency of the Solow Residual model for tradable sector productivity, time value needs its own place in the sun as well. Time based product is particularly scarce and finite. Hence it coordinates best with other forms of time based product. Further, mutual cooperation within a continuum of group patterns, would finally allow economic settings in which both parties gain from the process. This is particularly important, given the fact too much economic activity has become reduced to zero sum outcomes, and the protectionism they imply.

The Solow Residual will always be a vital component of economic activity. However, it functions best on the traditional productivity terms of tradable sector activity. Whereas in the time based product of non tradable sector activity, this approach often translates into lost marketplace potential. It's time to build new primary market formation for knowledge use, which is capable of measuring productivity gains as surely as those which the Solow Residual have indicated for tradable sector activity.