Notes on Money-Income Causality and Sticky Wages

The initial impetus for this post came from David Henderson's helpful encyclopedia entry for Christopher Sims. I found the money-income causality argument particularly interesting:

One of Sim's earliest famous contributions was his work on money-income causality, which was cited by the Nobel committee. Money and income move together, but which causes which? Milton Friedman argued that changes in the money supply caused changes in income, noting that the supply of money often rises before income rises. Keynesians such as James Tobin argued that changes in income caused changes in the amount of money. Money seems to move first, but causality, said Tobin and others, goes the other way: people hold more money when they expect income to rise in the future. 

Which view makes more sense? Upon applying Clive Granger's econometric test of causality, Sims concluded:

The hypothesis that causality is unidirectional from money to income [Friedman's view] agrees with the postwar U.S. data, whereas the hypothesis that causality is unidirectional from income to money [Tobin's view] is rejected.

Regular readers won't be surprised, that I also consider money-income causality effects in terms of tradable sector and non tradable sector contributions to general equilibrium outcome. Even as causality mostly originates via money to income, additional money supply (non inflationary) still originates in positive output changes. As always, real economy growth - or the lack of it - is the long run deciding factor.

While output growth is relatively transparent in tradable sectors, the lack of actual output transparency in (some forms of) non tradable sector activity, makes for too easy assumptions that causality may flow from income to money. Importantly, the income to money causality rationale can prove dangerous as well if carried too far. However, today's knowledge production dependency, which I've referred to as a form of secondary market, is so integral to economic activity that oft extensive price making in these areas isn't easy to discern. Price making in non tradable sector knowledge production can be all the more problematic, since it further impacts supply and demand for all markets in unpredictable ways.

Even though non tradable sector time based product depends on general equilibrium dimensions, once a nation's high skill professionals gain confidence in their country's resource capacity and market definition, wage or income demand becomes resistant to change, hence is "sticky downwards". Chances are, downward stickiness also provides rationale for the appearance of income to money causality, because a nation state will take extensive monetary and fiscal measures to maintain a given general equilibrium level, especially after general equilibrium conditions begin to suffer from too few ares of growth (wealth) origination.

Wage stickiness in tradable sector activity is generally less of a problem. These points of wealth origination are often quick to respond to changes in supply and demand, in that output levels which directly contribute (internally) to nominal income aggregates, can be readily shifted. On the other hand, professional time based product in non tradable sector activity, where compensation is externally derived from existing monetary flows, lacks the flexibility to quickly respond to market changes. Hence the activity of the latter imposes restraints on general equilibrium conditions which may not be easy to recognize. In a recent follow up of an earlier popular post re sticky wages, David Glasner observes:

Market-clearing equilibrium requires not merely isolated price and wage cuts by individual suppliers of inputs and final outputs that will be consistent with market clearing, but a convergence of expectations about the prices of inputs and outputs. And there is no market mechanism that achieves that convergence of expectations.

Consider why this matters, for what have become the required societal inputs which ultimately result in a "final" form of high skill time based product. Presently, the costs of human capital - due to societal expectations - are resistant to the recent ability of digital potential to contribute to learning by doing processes which could greatly reduce these initial cost burdens. Nevertheless, not only does the asymmetric compensation of secondary market knowledge application provide immense skills flexibility, it is integral to the very framework in which much of today's wealth takes place. Sticky markets indeed!

Hence what is now needed, is a digitally enhanced supply side structure for knowledge production, which can generate new wealth capacity to restore a growth frontier along the margins of today's NIMBY general equilibrium. A symmetrically aligned organizational structure creates internal reciprocity, which in turn makes internal coordination a viable economic option. After all, as Glasner rightly explained, it can be all but impossible to achieve the coordination of labour markets at a general equilibrium level. Fortunately, it's still feasible to create defined equilibrium settings at local levels, where the time value of our labour might once again contribute to overall growth and productivity.

Employment vs Staked Claims on a "Material" World

Now that the Walmart effect is also "forcing prices down" in India, Tim Worstall reminds us how this process is ultimately for the good. However, in "The Benefit of Killing Jobs" he asks:

But who should we be supporting here? Clearly, our innate prejudices are in favor of the small operator, that struggling family business, as opposed to some monster of late stage capitalism. We could further believe that a thriving community of sturdy independents is more valuable to us than some mere reduction in the prices of diapers or milk. 

But that's not the point here, nor is it what makes us richer. Economics advance is about using less labor to do any one task. This is why we obsess over productivity. It's not so that we can gain more from the same amount of labor either. It's so that some labor is freed up to go and do something else, which is the important matter.

Nevertheless, too many of our productivity gains continue to break down, at the level of total factor productivity. As some individuals continue to lose jobs, others are increasingly tempted to enhance their income through the revenue gains of more recent productivity advances. Carried too far, it's a process which could eventually undermine our structural mechanisms for societal coordination.

When local jobs are lost, this often translates into diminishing local service capacity as well. Much of the obsessing over productivity accomplishes little, when price makers (many of whom function beyond the Solow growth model) reduce aggregate productivity gains which could have contributed to a higher standard of living. Chris Dillow also responds to Tim Worstall's article, and he sums up:

...technical progress and destroying jobs are not sufficient to achieve good economic growth, even where markets are functioning well.

While I agree with Dillow insofar as this sentiment is concerned, how does it relate to his broader perspective, re future employment potential? For example, in what context do we express concern about "losers", if the world has supposedly experienced "enough" material growth? Who still gets a "living" wage, if growth ceases in its tracks and other revenue has already been claimed? In his post, Dillow references Daniel Cohen, the recent author of "The Infinite Desire for Growth", where materialism is questioned in the Amazon review for the book:

a future less dependent on material gain might be considered and how, in a culture of competition, individual desires might be better attuned to the greater needs of society.

What exactly is being implied, by pining for a "less material world"? Who is actually getting a chance to compete for life's wants and needs? Indeed, all is not quite as it appears in this regard. Materialism, like so much present day conceptualization, suffers from a moralistic framing which makes it difficult to approach the issue rationally.

After all, many forms of valuable knowledge are also essentially being hoarded, so that citizens lack the ability to compete in terms of skills production and presentation. How is knowledge hoarding any different from material hoarding, especially if material hoarding proceeds are used to compensate knowledge hoarders? Individuals whose time value seems off the charts in relation to others, are still being compensated via the revenue potential of countless material things. One of the best examples I've come across, is the extreme volume of sales necessary in a hospital thrift store, before sufficient revenue is collected to pay for a mere fraction of human capital value in hospital procedures.

For that matter, material hoarding can be likened to the "lesser" challenges of our natural inclinations for personal arbitrage. Alas, much of what we bring home, can seem more valuable than the extent to which our time may be perceived by others. Yet when we are confident regarding our time value in the workplace, our discretionary time is more often spent in the pursuit of collecting the memories of experiential product. But what about those whose time value has been prejudged and deemed not necessary for 21st century intellectual challenges? Will we further suggest that their junk collecting challenges should be tossed as well, in a less material world?

Is it possible to be a little less hypocritical? When anyone demeans an "infinite" desire for growth, is this imaginary cap expected to extend to the growth possibilities of the human spirit? Why not promote a world that actually needs less materialism to pay its intellectual bills? And above all, let's not assume society should determine the nature of desire and the greater good of all concerned, on specific one size fits all terms. Instead of attempting to hand out consolation prizes to the excluded, find ways to include them, through value in use means. It's one thing to take advantage of a material world for one's own extensive value in exchange benefits, but altogether another, to assume that is the only kind of world that is feasible.

Musings on Disequilibrium and Democratic Dictatorship

What to make, of more nations seemingly guided by a single dominant political "will"? Simon Wren-Lewis recently noted that China is okay with democratic dictatorship, and he asks, "Could the U.S. become a democratic dictatorship?" What about Trump's admiration for dictators, for instance? Is it naive, to hold out hope that more flexible forms of democracy can endure?

Nevertheless, many present day political struggles are largely due to limits on fiscal options, in a time of growing budgetary burdens. Few political parties are willing to concede defeat on earlier expectations, and meaningful fiscal reform appears less likely than ever. During the centuries when governments benefited from tradable sector dominance, opposing parties tended to have more fiscal room for their revenue preferences. However, once non tradable sectors begin to dominate, fiscal options gradually became more difficult, and disequilibrium became more pronounced as well.

Once budgets get out of control, fewer high skill activities can be reliably maintained as revenue dependent secondary markets, especially when firms and organizations are subsidized via price making terms. Since much of the budgetary fallout takes place as local examples of discarded government programs or "insufficiently subsidized" private firms, one doesn't always notice the effects of cumulative losses which in many instances are just reported locally.

It can be easy to rationalize that many government programs or businesses "deserve to die" if they can't support themselves. However, included in these losses, are more basic knowledge use frameworks which are slowly being displaced, even as they otherwise often lack suitable economic representation. Indeed we lack a coherent national story line, for the reality of what is being systematically discarded on a regular basis. Hidden in a myriad of examples, are some areas where government imposed austerity can be a particularly poor default mechanism. Importantly, budgetary losses at the margins, also translate into cumulative losses in trade volume for the use of knowledge and skill.

In other words, cutbacks in skill and applied knowledge are among the hidden effects of monetary disequilibrium. Even though output and employment may appear consistent, losses in the trade volume of potential human capital still deserve to be taken seriously. These losses can't be directly observed, however, and they lack suitable statistical framing, other than reductions in labour force participation which tend to be chalked up to demographics and other random factors. Many such losses in trade volume are instead experienced at a personal level, whereby individuals (all along the income spectrum) increasingly resort to doing things for themselves, instead of relying on market options.

Oddly, this unfortunate result is akin to a preindustrial state, for many time and place oriented services never fully shared in the opportunities of tradable sector prosperity. How might one think about the monetary aspect of this problem? Nick Rowe writes:

I think it's all about the role of money as Medium of Exchange. Which makes general equilibrium, and general equilibrium when some prices are "sticky", very different from a barter economy or one with a central Walrasian market where any combination of goods can be swapped with any other combination of goods by all agents meeting simultaneously in one big market.

Indeed, we especially observe disequilibrium in markets where space and time scarcities are closely correlated with product volume. Price making in these sectors, has much to do with the sticky wages which play havoc with general equilibrium conditions and trade velocity. At least to some degree, skills centered price making is responsible for a reduction in total economic value, among those who lose the ability to fully participate in economic life. Small wonder many politicians are now tempted to "dictate" the knowledge use settings they prefer, in misguided attempts to amend budgetary realities.

Are there reasonable microeconomic approaches, for today's macroeconomic problems? So long as nation states hold sway, a deeper macroeconomic understanding on the part of all concerned will be necessary, if budget realities are to be meaningfully addressed. Yet in all of this, fiscal policy can only be rectified, with supply side structural change that links our microeconomic circumstance with our macroeconomic realities.

At the above linked WCI post, one commenter observed: "Your explanation is strange. Money is brought in to help trade then you immediately start talking about it hindering trade." Rowe responds:

I wasn't clear enough. Money helps trade But when money is not working well, it doesn't help trade as much as it should, even though it still helps, because barter is (usually) even worse. Some trades don't happen.

And Rowe understood the frustration of another commenter who suggested micro was what mattered, while macro "should" simply be tossed! Nevertheless - macroeconomic confusion notwithstanding - without macro it would be impossible, for instance, to decipher how Say's Law could apply to the fullest extent in a monetary economy.

The monetary relationships of macroeconomics are important. Without sufficient understanding of those relationships, nations stand to lose many of the discretionary choices which are so closely tied with the output potential of tradable sector activity. Since product which is time and place bound cannot multiply, many of these forms of activity are mostly discretionary in the sense of coordinated choice sets among individuals and groups.

Representative democracy was largely made viable by the prosperity of tradable sector activity, and this process continues for emerging nations as well. However, democracies unduly burden their citizens, when too many local preferences for non tradable sector frameworks are imposed at national levels.  Ultimately, local settings are the best options, for the forms of democracy which seek to determine the nature of product with connections to time and place.

Is "Total" Specialization Subject to Decreasing Returns?

When does specialization provide the most benefit to society? Are there times when highly specified divisions of labour aren't as useful, as they seemingly should be? Specialization as total output expectation, isn't always as simple or functional as one might expect. Hence a recent post from Tejvan Pettinger, reminds me how specialization in general could benefit from a closer examination. In response to a reader who wants to know why specialization is efficient, he provides what can only be considered a traditional response:

Specialisation in the labour market means workers concentrate on specific jobs. Rather than learn every trade - electrician, plumber, doctor, teacher - it is more efficient and practical if we specialise in one particular job.

Of course, regular readers won't be surprised that I find complete specialization in the above areas to be problematic for total factor productivity, in low income settings which lack productive economic complexity. What if we are holding back simple economic outputs that could help to restore human capital - capital which is presently not perceived as fully functional? Only recall as well, that tradable sector activity generally adapts divisions of labour according to how product evolves, as opposed to the "permanent" divisions of labour which are frequently associated with non tradable sector activity.

Pettinger continues:

However, if we were just a barter economy - without money. This specialization would be a lot more difficult. If I grew potatoes - we could swap potatoes for eggs and vice versa. This is a very primitive form of specialisation - and it does work - even without money. However, this is very limited if we want to develop the complexity of the economy.

When you go to the dentist, he doesn't want paying in potatoes...If there is a form of money which is widely accepted, then you can pay the dentist with these coins and then he can decide if and when he wants to buy potatoes. 

Consider this natural progression of monetary representation, from simple commodities to more specific forms of product and skill arbitrage. One can readily imagine skills arbitrage claims as revenue ownership claims in a "territory" made up of potential time value supply and demand. However, specific skills arbitrage claims lack a true representative relationship, with the full range of potential time value claims in a given territory of time coordination - especially given the reality of time and place scarcities for economic engagement. Put simply: What if more dentists prefer money to potatoes, than there are potatoes to serve as an initial wealth source of monetary representation?

In other words, time claims without the participation of all time aggregates, can ultimately distort productivity and output in both tradable and non tradable sector activity. When time can't function as a unit of account alongside money, we lack any steady state relationship between time based product (such as the dentist time value claim) and total wealth capacity (goods and services) in a fiat represented services dominant economy.

On the other hand, it likely wouldn't present a problem in a tradable sector dominant economy, should dentist associations make specific skills/time value claims on aggregate wealth. The problem of sectoral imbalance occurs once similar skills/time valuation claims begin to dominate the economic landscape. Doctors prefer money to apples, etc. Once this pattern emerges, the convenience of monetary exchange for time based service providers, begins to create inconvenience for other economic actors who lack similar options for making explicit demands on existing wealth and monetary representation.

Unlike tradable sector divisions of labour - where compensation and activity continually adapt to changing circumstance - too much non tradable sector knowledge production has assumed that economic conditions would always be able to "obey" their terms of engagement. There's an interesting way to think about this disconnect from reality: Whereas goods manufacture has also adapted to structural change via "just in time" physical warehousing, knowledge based production has yet to even begin the process of doing so, even though the same digital transformational means are already in place. Meanwhile, the educational investment requirements for knowledge providers and participants - instead of utilizing adaptive "just in time" knowledge applications - still rely on "just in case" educational requirements.

These "just in case" requirements for human capital investment - in spite of extensive online knowledge content - assume it is still reasonable for people to memorize the equivalent of entire warehouses of knowledge, just to get at the knowledge particulars that even apply in one's daily interactions with others. It's no longer financially reasonable, for knowledge providers to insist on extensive "just in case" educational investment as the sole means of economic participation. Let's begin to think differently, about knowledge application and specialization in the 21st century.

Non Tradable Sector Dominance Has Economic Effects

More specifically, this historically recent sectoral dominance, includes dramatic effects on wage structure and long term growth potential, which have yet to be addressed. A recent Brookings article, "Thirteen Facts About Wage Growth", provides useful framing in this blog post for what continues to transpire, particularly since the turn of the century. From the article:

Fact 1: The share of economic output workers receive has generally fallen over the past few decades.

While this is true, there's a contextual issue in the above statement, which - if not taken into account - can obscure missing clues re both wage structure and economic stagnation. Due to imbalances (human capital requirements) in required inputs as contrast with outputs, the relative output potential of non tradable sector activity, is dramatically less than tradable sector output. Consequently, less output takes place which could otherwise accrue to either nominal wage aggregates or real wage benefits. That said, contextual framing for missing output is important not just because of its implications for wages, but also the renewed expectations of Washington, for increased revenue through legislative tax cuts.

In the centuries when tradable sector activity remained dominant, for instance, innovation often led directly to consequent gains in both wage growth and actual marketplace dimensions. Yet innovation that corresponds with non tradable sector time based product, tends to be more important for the relief of budgetary burdens, then the support of wage aggregates or marketplace capacity.

Since the structural dominance of input intensive activity leads to less output overall, entire economies bear the additional costs. Even though central bankers clumsily attempt to reduce non tradable sector internal inflation, via less than complete monetary representation, the main effect is instead a slow but steady reduction of a society's total economic commitments. Thus the central banker response to non tradable sector crowding, unfortuantely intensifies the initial crowding effect. Meanwhile, the lack of flexible income options for time based services, has made it difficult for lower income levels to fully participate in non tradable sector activity, in spite of its present dominance.

Fact one required a long response, since the lost potential output of non tradable sector activity is by far the most important consideration, for either lost consumption capacity or sufficient revenue sources for governmental needs. However, I also want to touch on some of the other points raised by Brookings:

Fact 2: Wages have risen for those in the top of the distribution but stagnated for those in the bottom and middle.

When tradable sector formation was dominant, more revenue was composed of income which derived from total output. Management shared this revenue with workers, for workers shared in the creation of the product. Whereas in non tradable sector activity, it is simpler for business owners to assume ultimate responsibility, for the knowledge based product they represent. Given these conditions, today's time based service providers are under no obligation to share output revenue with employees, and may choose to compensate employees according to other criteria.

Consequently, much of today's non tradable sector knowledge based work has wide income variance by system design. While skills variance among employers and employers may not be as wide as income variance implies, there's little room for skills egalitarianism, given the revenue streams which these forms of organizational capacity rely upon. Likewise, much of today's dominant pass through businesses, derive income from non tradable sector activity, which in turn limits potential growth gains from tax cuts.  Again, from the initial Brookings article:

Fact 3: The education wage premium rose sharply until about 2000, contributing to rising wage inequality.

Non tradable sector activity dominance was just beginning to make its full effects known, at the turn of the century. One notes - for instance - when some of the initial losses took place in marketplace share, for a wide range of tradable sector product. Among these were tradable product as represented in my own workplace (at that time), for alternative healthcare OTC remedies.  As revenue claims for non tradable sector time based product began to displace the market share of tradable sector product, less overall output was the result. In aggregate, this also meant that fewer individuals would gain full monetary compensation from either tradable sector or non tradable sector employment.

Fact 7 from Brookings, also warrants a mention:

Workers have become less likely to move to a different state or to a different job, reducing wage growth.

Mobility is more closely associated with tradable sector activity, in large part because its organizational capacity and product definition, is dynamic and still evolving. Whereas, too much of today's non tradable sector activity - especially time/knowledge based product and housing - are rigidly defined. This lack of flexibility only adds to the perception of non tradable sector product as lacking in mobility, rooted in geographic preferences and too closely tied to specific revenue flows.

While most points made in the first Brookings article have relevance, some are more important for economic outcomes than others. However, the second Brookings article (re pass through businesses) reminded me how non tradable sector dominance would reduce growth potential from recently proposed tax reductions. When economies were still tradable sector dominant, reductions in taxes were far more capable of contributing to economic vitality via additional capital to increase output. Today, additional income gains from tax reductions, are relatively more likely to accrue to what is already well compensated skills capacity. The problem? Time based product - regardless of compensation - cannot multiply itself to create additional output and marketplace capacity.

Apples, Haircuts, Growth and Output

What might apples and haircuts - as an imaginary economy with only one service and one product - suggest about equilibrium growth and output potential? A recent post from Nick Rowe, encouraged me to explore the dynamics and make some related connections as well. Here's Rowe's opening paragraph:

An economy produces two goods: apples and haircuts. The production function for apples shifts up or down every year at random, depending on the weather. The production function for haircuts never shifts. The weather causes relative prices to change. When there is good weather, and the apple harvest is large, the price of haircuts in terms of apples rises (the price of apples in terms of haircuts falls). When there is bad weather, and the apple harvest is small, the price of haircuts in terms of apples falls (the price of apples in terms of haircuts rises).

Importantly, weather defines the setting, as it establishes an output range for the initial product. Good weather translates into a good crop in which not only does the abundance of apples cause the price of each apple to fall, the greater abundance of apples overall allows the costs of haircuts to rise. Likewise, bad weather is a smaller crop in which each apple costs more, and there is less apple output in aggregate for the resulting haircut valuations.

The beauty of the one product one service economy, is that it illustrates what I've referred to as primary and secondary market functions of output and growth potential. Apples can be likened to the random resource capacity of primary markets, which provide settings for initial market conditions. Haircuts are the secondary market capacity which represents time based services in general. That said, however, the fact that time based product is dependent on primary markets is obscured at the aggregate level, by the still growing effects of Baumol's cost disease. Consequently, the lower productivity of time based services in its dependent position, instead of creating wealth via its own means, is gradually displacing the resource capacity of primary market functions. In some recent discussions re cost disease, a commenter at Scott Sumner's blog left this useful reference point from William Baumol's book on the subject:

In the long run, wages for all workers throughout a country's economy tend to go up and down together. Otherwise, an activity whose wage rate falls behind will tend to lose its labor force. Auto workers and police officers will see their wage rise at roughly the same rate in the long run, but if productivity on the assembly line advances while productivity in the patrol car does not, then the cost of police protection will rise relative to manufacturing. Over several decades the two sectors differing cost growth will add up, making personal services enormously more expensive than manufactured goods.

If today's time based service products are dependent on primary market formation - in ways that are mostly being papered over via extensive debt, taxation and hidden unemployment - what mechanism created such a massive problem in the first place?

This circumstance can actually be traced to money as representative of all resources and marketplace output - be those resources scarce and finite such as time or land product, or the sum total of all product capacity. Yet one only needs to recall that the value of random resource aggregates continue indefinitely to pull away, from the scarce and finite product of time and land. Nominal income is embedded in the latter, in ways that provide a mirror for the valuation of random resource capacity. Various marketplace participants stake income claims ahead of other would be participants in the economy, simply because they can. Even though the subordinate position of time value has price elasticity which responds normally to output in the above one product one service economy, the sticky wages of a complex equilibrium are reinforced by land values which already mirror local aggregate income levels.

Since time value does not (yet!) have formal representation as a store of value, it doesn't have a specific, economically quantitative template whereby production gains can be generated. Instead, today's time value has little "choice" but to exist in relation to total marketplace output. Even though the prices of haircuts (as a secondary market, i.e. not internally generated) rise and fall with apple output in a simple economy, it's difficult for anyone to determine a "reasonable" time based product value, in relation to the full resource potential of an otherwise productive and complex economy. To add to the confusion, a vast majority of income is ultimately stored in real estate - a process which particularly makes time value resistant to good deflation and production norms.

Again, return to the thought of money as the sole representation of marketplace output as a beginning point. The reason that time value aligns with total resource output, is the fact that it does not (presently) have the option of aligning production capacity in relation to itself. Not only would internal facing of services generation overcome Baumol's disease, this organizational capacity would move into a primary market position that generates new wealth. Over time, time based services as a primary market position, would increase total growth and output. Once tradable sector activity experiences the massive relief of higher labor force participation and a strong customer base, one could even hope that today's political chaos will subside.

There's another problem for money as the sole representation of total output value. Of late, some seek to downplay the role of money in macroeconomic activity - in part because it does suggest hard equilibrium limits beyond the ways in which today's "maker" roles are conceptualized. Indeed, secondary market formation is becoming more self limiting, as the Baumol effect creates more distortion for budgets and debt formation.

Nevertheless, I believe that time value as expressed on formal, primary market economic terms, would be a better approach to long term growth than using debt to sustain an excessive amount of secondary market patterns. Some people think about these things and despair. So it confuses others, when I'm still able to get excited about the potential for a better economic future. Is it still possible to convince anyone that low labour force participation and reduced growth potential can be addressed via a marketplace for time value? I certainly hope so.

Long Term Growth and the Debt Factor

Is debt something that we should not even be worrying about, in terms of economic stability? Some are concerned about Mick Mulvaney's nomination to the Office of Management and Budget. Kerry Pechter writes:

Mulvaney has said...that one of the greatest dangers we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it's dangerously untrue. If it were true, the country would have failed long ago.

Pechter is right that the budget deficit can all too often be an effective political weapon. Sometimes budget rationale only comes into the picture, as means to arbitrarily limit economic activity. He continues:

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can't productively solve the Social Security and Medicaid funding problems, or defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.

Unfortunately, some things have become unaffordable (beyond a certain general equilibrium limit), given the way they are currently structured, and the position they may hold as an aggregate medium of account function. The relationship of aggregate debt over time (in relation to output and growth trajectories), is important, However, I definitely agree with Pechter's conviction, that it is important to preserve valuable economic complexity. Not everyone who expresses concern about debt or budget obligations, does so with a corresponding intent to preserve valuable knowledge use or skill, in the marketplace. Budget obligations should not be a convenient fall back position, for political coalitions which would undermine economic potential - mostly with intent to protect the supply side limits of special interests.

That said, debt cannot cannot continue to grow indefinitely, in relation to output which is clearly measured and ascertained as it is created. Oddly enough, the more that a society is willing to internally account for the measure of wealth when it is generated (via primary market means), the more debt that populations and policy makers are likely to remain comfortable with, as well.

Once, it was quite logical to fund knowledge via open ended (and secondary market) means, when the use of knowledge remained (somewhat) minimal in relation to manufacture and agriculture. Indeed: so long as primary markets maintain a healthy balance with secondary markets, it remains safe to fund for knowledge, via the open ended means of debt and further budget obligations.

Today, however, everything has changed in this regard. Secondary markets are presently too dominant in relation to primary markets, which in turn negatively impacts the nature of budget obligations. And as knowledge and information has became ubiquitous in the marketplace, knowledge is fast becoming underutilized (insufficient practical dispersal), because too little of it is being generated via reciprocal and direct means. The present lack of economic reciprocity patterns for knowledge use, means many who prepare for knowledge based work are deemed "excess" labor capacity.

We need more means to solve for economic reciprocity at the outset. Any time value or product which has to be politically approved in order to occur, will always be subject to political forces that use budgets to bludgeon such endeavour out of existence. By closing the circle of reciprocity in terms of knowledge use formation, it becomes possible to preserve economic complexity at multiple levels of society. Solving for economic reciprocity at the outset, means less debt over time is needed. And the more economic complexity that can be generated as primary market activity, the less anyone needs to worry, about the debts and demanding budgets, that remain.

Some Benefits of Resource Linked Money

One responsibility for the equilibrium corporation as an institution, would be accounting for the new wealth which a marketplace for time value could generate. In this scenario, time value enters the marketplace as a basic commodity, and it brings new money into the economy which is also resource linked. Resource linked money would specifically focus on resource sets which are important for all individuals, in order to as closely approximate monetary compensation as possible, for one's workplace efforts. By utilizing internal organizational capacity for these resource sets, good deflation would finally become possible for non tradable sector activity. This particularly matters in a macroeconomic context, since it provides a way for time based services generation to sidestep the problems of Baumol's cost disease.

Baumol's cost disease is a general equilibrium problem, in that the income levels of (relatively) less productive time based services, nonetheless need to rise to meet equivalent work offerings in local primary market employment. This organizational capacity for time based services (as secondary market  formation) is externally based, due to its dependence on the valuations of primary market positions. Consequently, the amount of time based services possible (on these terms) is determined by the amount of primary market resource capacity (and valuation) which is available.

This secondary market resource structure, which reflects local aggregate income and real estate value, may also include state and national revenue. While these additional income flows are positives, the valuations they create are nonetheless a double edged sword, for economic access. Further: the most prosperous regions include international resource connections which contribute to local equilibrium values as well. Steve Randy Waldman recently noted Baumol's cost disease as a factor for population density limits, and in a post last month I also wrote about some of the challenges for generating more density in cities which are particularly composed of secondary markets.

Far more is at stake in general equilibrium conditions, than simple building costs or personal time use considerations. Multiple markets tend to overlay the ones which are obvious, and these additional markets operate according to their own sets of supply and demand constraints. The availability of resource capacity which flows from other nations and regions, translates into higher local costs than would otherwise result for working and interacting in the most prosperous regions. Yet these aren't the only additional cost factors, since traditional construction in many locales, has seen little innovation for materials, design or even mass production.

The sticky markets (and wages) of general equilibrium, make it difficult for non tradable sector factors to be organized as a clean slate that could extend across multiple categories. However, it is possible to achieve good deflation for non tradable sector activity, when the process is channeled through an alternative equilibrium, which would create a clean slate for both services generation and local asset formation.

Doing so would allow building construction to more closely approximate actual costs. Meanwhile, these costs can be further trimmed through innovation in materials and design, along with mass production of the more basic building components. This physical environment makes it possible to approach knowledge use as an internal coordination mechanism. Due to the lower local costs of living, the level of income one normally associates with knowledge based endeavour is no longer necessary.

Consider how resource linked money can contribute to this scenario. In alternative equilibrium, time based services - regardless of the level of skill involved - would no longer have to directly compete with the productivity requirements of prosperous regions, because these services would operate in a time based continuum which exists solely in relation to overall group time value. The resource link is made explicit, in that it is institutionally connected with the time continuum social benefits, alongside lower costs for the physical components of local environment. Even though this time value is monetarily compensated at less than minimum wage, it does not face the housing or time based services costs which are expected in general equilibrium conditions - particularly in prosperous regions.

Another important consideration: the compensation of resource linked money, creates a coordination space for individuals, which accrues from the first workplace efforts of one's youth. After all: how much of what is sought in today's prosperous regions, really consists of more than one's personal space for coordination with others? This lifetime position is flexible to an extent that portions of it can be rented to others, when not currently in use. Should any group begin anew elsewhere, each individual's coordination space remains intact, within the overall structure.

Resource linked money would make it possible for more individuals to enter knowledge based work and services in regions that now lack economic complexity, yet without having to sacrifice basic life amenities just to do so. Resource linked money could provide means to grow knowledge and time based services directly, without having to transfer wealth from other sources in order to do so. Indeed, should knowledge become more closely associated with wealth creation, much of the political confusion of the present, might very well subside.

The Vital Structure of General Equilibrium

Tradable sectors provide a sizable contribution to general equilibrium stability, in part because they often include a representative single commodity price - one which extends across regions and nations. Nonetheless, while a normally reliable price construct exists - in contrast to somewhat indecipherable non tradable sector pricing - tradable sectors remain subject to swings in supply side conditions, which affect costs and resource availability.

In spite of this changeable supply side factor, the primary market position of tradable sectors is more closely anchored to overall economic conditions, than secondary markets and/or their related non tradable sectors. The latter does not affect general equilibrium value in the same way via price swings, because secondary markets aren't coordinated across a full (international) range of resource potential - especially in terms of economic time representation.

Consequently, when tradable sectors experience supply side shocks, the maintenance of a level nominal target may provide sufficient means to smooth the shock across a full spectrum of primary market value. Yet aggregate spending capacity has not been well maintained by central bankers in recent years, and too many economic activities have been diminished, by what should have been the limited consequences of individual supply shocks. By coddling the secondary market of credit formation, central bankers are missing both the (international) wealth templates of tradable sectors, and the nominal income which bridges all sectors.

Another general equilibrium consideration is price stickiness - especially in the knowledge based wages (and asset structures) of local, unique equilibrium settings for secondary markets. While these settings might appear decentralized due to their price variance, they are a direct monetary response to internationally and nationally (centrally) managed wealth generation. In a recent post, "Price stickiness is a symptom not a cause", David Glasner wrote:

All the theory of general equilibrium tells us is that if all trading takes place at the equilibrium set of prices, the economy will be in equilibrium as long as the underlying fundamentals of the economy do not change. But in a decentralized economy, no one knows what the equilibrium prices are, and the equilibrium price in each market depends in principle on what the equilibrium prices are in every other market. So unless the price in every market is an equilibrium price, none of the markets is necessarily in equilibrium.

Glasner is right, in the sense it can be difficult indeed to decipher equilibrium conditions in secondary markets. My concern of late is that we presently expect too much of our secondary markets in terms of marketplace capacity. Until more secondary markets exist in a primary market position, they will present problems for primary international markets, which are consequently experiencing deflation from inflation targeting.

Is it necessary to "know" equilibrium prices for every market? Secondary markets and non tradable sector activity provide price coordination in a different capacity than tradable sectors, which partly accounts for the unique qualities of these markets. While their value is also a reflection of primary market wealth, secondary markets have the additional responsibility of coordinating time based product which is not (yet, at least) sufficiently represented in primary markets.

Even though sticky wages are a general equilibrium problem, individuals will eventually need a more direct approach, in which existing resource capacity better adjusts to the changing wage realities of the present. In fact, this process should have already begun, decades earlier. Of median wage growth, Ryan Avent writes ("The Wealth of Humans", page 60):

Median wage growth, or growth in wages for the American worker in the middle of the distribution, did far worse. Indeed, since 2000 the real wage for the typical American has not risen at all. Looking further back does not much improve the picture either; since 1980 the median real wage is up by only 4 per cent. Not per year, but over the whole of the period. And if you then focus in just on the real wage of the median male worker, the duration of the stagnation extends back into the 1960s.

Too many aspects of secondary market structure contribute to this dilemma, and the response thus far has been inadvertent attempts to adjust wages to consumer expectations, instead of the other way around. Hopefully, Ryan Avent's latest book will make more of this discussion a commonplace. I am particularly grateful he recognizes the fact that - in the years ahead - marketplace realities will need to do a better job of adjusting to wage realities.

While I hardly expect general equilibrium circumstance to bear this responsibility at the outset (given extensive investments and commitments to marketplace definition), other portions of the population need not have to take this one size fits all approach, for equilibrium structure. Rather, experiments at the margins would make it possible to determine new forms of marketplace structure which more closely approximate existing wage capacity. All too often, sticky wages have been quite important in the general equilibrium conditions which have attempted to impose the same consumption definitions for all citizens.

"No Growth Needed": The General Equilibrium Response

Depression was only narrowly averted, in the last decade. One way that it's easy to tell, is the fact present day stagnation talk resembles dialogue from the Great Depression - albeit with a few twists this time, given important changes in the makeup of economic activity in recent decades. The "traditional" stagnation view also comes across in a recent post from Timothy Lee, who looks at the maturation of scale and consumption fatigue (of physical goods or "things") as contributors to slow growth. He echoes the thoughts of many, that supply side growth is supposedly not even necessary. Only consider that fiscal infrastructure arguments aren't exactly compelling, either. Who wants to invest in human capital, for a job in bridge and road maintenance?

Regular readers know I find talk of economic stagnation, concerning. "No growth necessary" arguments ignore the reality of those who still invest heavily to access a general equilibrium setting not structured for full high income access. New institutions are needed for broader inclusion, and economic stability could also be sought on terms which don't require sticky wages. However, many remaining problems regarding economic access aren't widely recognized. The fact they are not, comes across in reasoning from a commenter in Lee's post who opined, "we need new strategies for excess money to support our economies".

None of this is about a need for "excess" money! The circumstance of a rapidly evolving economic environment is still being missed. And what about the fact nominal income still needs stronger support from central bankers just to maintain present economic stability, let alone the issues of long term growth and inclusion? Okay, I'll take a deep breath and back up a bit. First, think about what is happening politically. "Too many" consumer goods or no, there's heavy irony in "spent out" reasoning, given the fact that so many want tradable sectors to "come home" so a baseline of fiscally provided service structure can be maintained. The threat of protectionism has returned, and it has been roundly discussed of late.

But another problem looms on the horizon. Economists - whose reasoning is in many ways based on quantification - appeared to be arguing in high places recently for what amounts to less quantification. Granted, there are aspects of economics which do need to be expressed on less quantitative terms. Only consider how we continue to rely on centuries of economic reasoning, prior to today's statistical approach.

Just the same: there's reason for concern, when Davos movers and shakers muse about happiness and the supposed inadequacies of GDP, instead of the vital 21st century services economy which desperately needs greater clarification in GDP terms. Let's don't use "faulty or outdated GDP" to obscure the fact that making sense of time/knowledge based service product is hard work. When services are not well understood in terms of wealth contribution or long term growth potential, accurate monetary representation for citizens is also lost.

In fairness to all concerned, the measure and understanding of services formation (in total resource aggregate context) is not a straightforward process, because what is asymmetrically compensated does not exist in the same linear dimension as product which directly generates new wealth. However, without careful quantification for time based product, it becomes more difficult over time to coordinate the time based services product that people wish to produce and consume. The fact that many time based services remain ensconced in government activity, obscures the marketplace coordination factors which could contribute to more productive organizational capacity.

How to think about the time based product that has proven difficult to quantify? These services are asymmetrically compensated in general equilibrium. In other words, time based product which includes knowledge use, has not yet been generated as a direct source of wealth, but is funded either through either privately or publicly held wealth. This is why time/knowledge based product hasn't (yet) been able to "grow" the market for knowledge use diversity, at an aggregate level.

Consequently, too much knowledge (in time based product) is compelled to prove "superiority" over other forms of knowledge which are competing for the same pool of public or private wealth. Since this form of knowledge competition is in a beta position (to the alpha position of existing wealth/revenue), knowledge use competition has been expected (thus far) to drive out other knowledge use options, instead of growing a knowledge use market in aggregate. And with the loss of knowledge use, goes the loss of employment potential - especially given the fact government pays twice for each product unit of time based knowledge, whereas private industry only pays once.

The latter should mean greater efficiency for time/knowledge based product, right? However, organizational cost efficiency was lost, due to the fact private knowledge use compensation in aggregate was limited by design. Hence government provision of knowledge based product was mistaken at the start. Even though the government beta limits on knowledge use growth are involuntary, the alpha limits on a broader knowledge use marketplace are intentional. The sought after production and consumption of the 21st century can't gain traction in terms of marketplace growth. Fiscal policy has no choice but to pay two dollars, for employment that could have been had for a dollar on monetary terms, had the supply side been willing. Indeed, if governments could "magically" pay once, knowledge based work may have been viewed as the best fiscal option for the recessions of the 21st century.

What about growing the knowledge use marketplace on private terms? Unfortunately, for presently existing private institutions, that would mean diluting the salaries that already exist. This is one reason I suggest creating an alternative equilibrium, to make it possible to grow knowledge use without damaging the wage structure of general equilibrium. It is difficult for all concerned, to directly address the reality of time based services as the most important GDP component of the present. Small wonder it's too easy to bash GDP and talk about happiness instead! At the very least, service provision can be quantified through compensation for mutual cooperation and assistance, so that general equilibrium can better meet the obligations for knowledge production it already holds.

Some Musings on Money and Freedom

Why is it so important, to equate an ability to earn money with freedom? So long as individuals have the capacity to earn money for their work efforts, they maintain the chance to create new beginnings for themselves, when life's unexpected "endings" and other scenarios leave them compromised. Even though lack of economic access is also closely related to broader circumstance, for those who lack access, that loss is keenly felt at a personal level. All too often, it manifests as the pain experienced due to one's own personal shortcomings.

When it becomes difficult to maintain vital economic connections through work, social connections with friends and family tend to break down over time. Money is a resource conduit for understandable and reciprocal interaction in today's world, which people otherwise would not have. It is the link between the resource capacity the world holds, alongside the resource capacity of our time value. The Beatles sang "Money Can't Buy Me Love" when another generation was beginning to question the validity and importance of money. Just the same, access to money through own's own personal efforts is more important now, than it ever was in the past.

Even though excessive requirements for living and working mean less work for governments to raise tax revenue, the high bar for access also means governments end up assisting or otherwise managing externalities (crime) for the individuals who fail to make the grade. These access limitations make it more difficult for the marginalized to take part in life's most important primary relationships, as well. Often, the unemployed will convince themselves they've found the fortitude to overcome such losses, only to keenly and unexpectedly experience them again. In one sense I am fortunate for having lost economic access late in life, because that means fewer years will be needed to manage the consequences. I would not wish such a loss on anyone at an early stage in their lives. That is far too long, to be expected to live with the reality of exclusion.

Basic or other forms of guaranteed income pale, as compared to the self respect that money can buy through employment. While this approach may appear "moral" as opposed to welfare or disability payments, basic income nonetheless amounts to a lifetime judgement from society. It would be far better, for today's institutions to generate sufficient economic room for inclusion, so that people can continue to make their way in the world. Unfortunately, a basic income would strengthen class divisions which are already starting to become apparent.

No one can equate a basic income with new beginnings. This approach is solely a public apology, since the efforts of many are not wanted or needed in today's existing institutions. Arguments for basic income, are in some respects an uneasy truce for opposing political parties, given a lingering economic stagnation. It's a response which reflects a growing belief that there is only so much room in society, for individuals to achieve success.

Of course others also doubt the connections between money and freedom. In some instances, it isn't easy to equate the money that results from work with true freedom, because the need to work appears as though a burden if one doesn't have the "right" employment. And when there are more bills to be paid than money to pay them, money may not appear as though freedom!

But think about the alternative scenario, of a life without work. Weekends and vacations are meaningful when one has a job, whether or not one's work week holds sufficient meaning of its own. Yet when jobs are lost, those who no longer have employment are more likely to prefer the activity of the workweek taking place around them, to feel some sense of normalcy. For these individuals, it is clear, that money is key to personal freedom and respect. While psychology pays close attention to problem solving in interpersonal relationships, spiritual writings often stress the necessity of personal self sufficiency as key, before other aspects of mental clarity are truly possible.

As present day economies were beginning to evolve, those who believed in the potential of the marketplace, knew just how important the correlation between money and freedom really was. Jerry Muller, in "The Mind and the Market", stressed how Adam Smith felt about this connection:

For Smith, the most liberating effect of the rise of commercial society was its replacement of direct and open ended personal dependency with the cash nexus, the contractual relations that limit the entitlement of men to dominate one another. To the extent that every man became a merchant, rather than a slave, retainer, serf or servant, society became more interdependent, while direct, personal dependence declined. This was one of the many senses in which commercial society provided a greater degree of freedom than previous social systems. 

We need to make certain everyone has means to remain economically viable. There are ways to utilize knowledge in incremental ways, which would allow the marginalized greater inclusion than they now experience. There are ways to structure ownership so that those who are not as strong, can maintain a life which doesn't overwhelm the skills capacity and ability they do hold. By making certain that money as concept remains linked to money as personal freedom for all concerned, many other problems can be addressed as well.

Maintenance as the First Economic Discipline

Lee Vinsel and Andrew Russell, in an essay for Aeon (ht The Browser), advocate fiscal stimulus, by reasoning that innovation is "overvalued" and maintenance "often matters more". Might this assessment be accurate? Not so fast. Let's explore maintenance and innovation in a broader setting. Their essay provided suitable context for me to revisit a simple structure, with maintenance as the base. I began thinking about the framework in the early years of this project, and described it in notes as five economic disciplines. While I wrote various paeans to maintenance some years earlier, most of those earlier versions haven't surfaced in blog posts. Hence I found the article title and opening lines by Vinsel and Russell, quite interesting:

Hail the maintainers. Capitalism excels at innovation, but is failing at maintenance, and for most lives it is maintenance that matters most.

Economically and socially, the latter part of their sentiments is accurate, insofar as maintenance requires more commitment than other time based elements of economic activity. However, one problem is the fact their context for maintenance is entirely too narrow. Also, I somewhat disagree that "capitalism excels at innovation", given the numerous structural impediments which presently stand in the way of innovation at multiple levels. And oddly, the authors only associate innovation (which they devalue at length) with private endeavor, instead of public endeavor!

Fiscal stimulus is no longer a reliable source for even simpler, government defined forms of maintenance, given what are now relatively full general equilibrium conditions. While "full" (static or reform resistant) equilibrium need not mean zero sum economic activity overall, it does imply less revenue for proactive fiscal measures, given the arbitrary restraints on growth which private revenue sources now face.

Most important for this post, is that the full scope of economic maintenance extends well beyond present day government definition. Maintenance can be thought of as of the bottom supporting layer of an economic pyramid. In particular, maintenance is integral to the purpose of time based services product which incorporates knowledge and skills on a routine basis. When fully utilized, this function replicates previously agreed upon economic activities or disciplines (as represented by four "higher" economic roles), so they may become broader marketplace components.

Note in particular, that building new physical infrastructure is not equivalent to the maintenance of "old existing things" as described by Vinsel and Russell. These are two distinctly separate economic activities. Often, governments are responsible for physical infrastructure, but mostly generate real progress in this regard whenever broader sets of resource capacity include elements of serendipity (In other words, good fortune for government investment generally includes more than a low interest rate environment). The act of generating new infrastructure, can be thought of as part of a building discipline, which occasionally includes creating additional definition for the (prior) building process. Some readers might remember the five economic disciplines which I referred to in earlier posts:

maintenance - building - creating - understanding - healing

While the above authors are right that maintenance is a basic building component of economic activity, this is also true for the majority of today's time based activity - of which time based maintenance for physical infrastructure is only a small part. Time value as maintenance, also provides education as to what has already occurred in the four higher components of the economic pyramid.  Physical infrastructure is a component of the second step, and exists on a par with other forms of building which contributes to growth.

Today, any calls for additional revenue to support maintenance activity, are suppressed by previous value claims for time based product in general equilibrium conditions. Most important, is the fact this fiscal policy "wish" is but a small part of the maintenance product, that civilizations greatly benefit from. Maintenance has become the promulgation of all existing useful knowledge and skill, through means that are only occasionally linked to formal education.

Consider innovation as the third level or discipline, which is actually the process of creating. Yet today, much of what is referred to as creative endeavor is actually time/knowledge based maintenance activity which is the result of understanding. Today, prosperous regions serve as sources of patronage for knowledge workers, through the asymmetric compensation that fiat monetary formation makes possible.

Also consider the placement of building on this economic pyramid. While the idea of building (whether physical, or the mental "building" component of understanding) arises first, maintenance results from the originating idea. More maintenance is needed than building, in that the original idea is economically replicated and/or preserved through time based product. Again this is true with innovation, as the (new take on the original) idea is replicated through repeated patterns of building.

Understanding matters in this context, because it is particularly a social process of combining the various elements by which people agree to the coordination of economic activity. Understanding can be thought of as the building of mental infrastructure. Once a point of understanding is reached, disciplines can be replicated together. That said, it may be obvious now, what the role of healing represents in this process - particularly when economic and social understanding begins to falter.

Whereas creativity is often associated with the innovation of the physical realm, healing is closely associated with the innovation of the realm of the mind. One might say that the process of (arriving at) understanding or healing does not need to occur often, in order to be be replicated, as is also represented by the small space they require at the top of the pyramid. However, when the moment arrives these attributes are needed, should the moment pass and they are not gained, the entire economic edifice can be affected.

As nations move from the production of physical product to that of knowledge based product, they have attempted to do so on asymmetric terms. Unfortunately, asymmetric compensation has little choice but to seek out the highest level of skill and ability, in a marketplace of time value which includes a wide range of ability. The result? Economies gradually become more fragile, as alpha participants leave (the more numerous) beta participants stranded along the margins. Presently, both public and private entities have vested interests in seeking out the "best" skills and knowledge sets, i.e. the most popular, healthy, and in line with expected orthodoxy. Even social workers are beginning to advocate for those with chronic illness, who consequently face the danger of expulsion from today's workplaces, before they feel able to safely retire or work on a part time basis.

However, betas need to remain economically viable. Time arbitrage would not only provides means for them to do so, but also fulfill broader maintenance roles in the marketplace. Beta groups would have new opportunities for stable participation, through their combined time value potential. Further, new work can be generated along the entire continuum of human challenge. Instead of having to represent a single facet of economic value through external assignments, these individuals would have the freedom - through mutual employment - to move across the disciplines through the course of their lifetimes.

Why Distinguish Wages from Income?

Income and wages represent different aspects of economic conditions. While wages are more closely tied to localized resource coordination, income reflects resources as connected to broader resource use patterns. Wages are what people and institutions provide, in more or less isolated circumstance which generally don't capture other marketplace gains in the process. Whereas income may include wages plus additional resource capacity that a given institution is associated with.

At the broader level of aggregates for instance, nominal wages are different from nominal income, because the latter is more closely aligned with total (national) spending capacity and a nation's degree of economic complexity. Unfortunately when income and wage expectations become confused, they can overwhelm existing organizational patterns, due to somewhat random claims on resource capacity. Even though many of these claims are associated with fiscal income, by no means is this simply a problem for government budgets.

Potential "needs" on the part of wages and income, are best understood in relation to existing resource capacity, in order to reduce the existing pressures of general equilibrium conditions. Even though it would be difficult to separate wage capacity from income capacity in general equilibrium terms, knowledge use systems could provide means to do so in alternative equilibrium settings. It is difficult to change income expectations in general equilibrium, in part because operating costs and asset values have been structured around these expectations for a long time.

Populations have increasingly relied on income gains, to compensate for the fact that in recent decades, consumption "necessities" require larger portions of what was previously disposable income. Still, these income adjustments cannot account for a decades long lack of innovation in non tradable sectors, which only leads to further imbalances in both aggregate supply and demand.

Non tradable sectors particularly rely on the revenue of standard corporate income for their organizational capacity, instead of the wages associated with economic activity beyond prosperous regions. Standard corporate structure maintains a relative income producing advantage (as opposed to base wages) depending on what is sometimes a worldwide market position. Whereas the nature of market connections for local municipalities tends to shift over time - a fact which can negatively affect previously established local income demands.

When municipalities rely on legalized income requirements (including pensions, etc.), they can eventually run into difficulties re long term infrastructure maintenance. Local governments often struggle with budgetary frameworks for salaries and benefits that were designed during periods of prosperity which contributed to local economic conditions. New forms of local corporate structure (that combine private and public efforts) need greater flexibility in this regard. A stable (internal) base wage would provide for both local asset formation and maintenance costs. By separating income potential from wage potential, new communities need not be caught in unrealistic scenarios for infrastructure maintenance over the long run.

However, wage compensation for time arbitrage would be understood as a starting point for economic activity. Otherwise, non tradable sector egalitarian wages with no discretionary income potential (from tradable sectors), would quickly devolve into a no growth environment. Consider the primary difference between symmetric wages and asymmetric income in this instance. Coordinated time value exists as a steady state, while income remains representative of potential for expanding resource capacity. Distinguishing wages from income allows growth to evolve without creating false expectations as to income capacity, which relies on events that go well beyond local conditions. The time resource value which people know they have, is that which involves the least commitment risk for asset and services formation.

In all of this, capitalism as present day organizational capacity, is the income potential which holds the greatest promise for personal freedom. Knowledge use systems would embrace the discretionary income potential of tradable sectors which serve to bind small local economies with their surrounding neighbors. The primary purpose for separating wage capacity from income capacity, is to prevent the dilution of time value in relation to the lower rungs of a hierarchy of needs. Whereas income and wages combined represent total resource capacity, an internal wage structure provides greater certainty for life's basics, which in turn means courage for life's greater challenges.

Rediscovering Work, and the Double Coincidence of Wants

Addressing the need to redefine knowledge based work on broader economic terms, should be front and center of today's discussions. Particularly when a Nobel prize winning economist (for trade patterns, no less) is right in line with Donald Trump, in suggesting mercantilism as an appropriate policy response. I apologize in advance for the portion of this post which comes across as a rant, but I never would have expected in the course of my lifetime for Paul Krugman to become an advocate for mercantilism.

If society does not create means to incorporate (literally) the knowledge and skill investment already contributed to the marketplace through educational costs, much of that personal commitment and effort will be lost. Seriously, did no one believe it wouldn't become necessary to transform non tradable sectors, once tradable sector production efficiency meant relatively less employment in all parts of the world? How many times have nations squandered economic evolution, on mercantilism, nationalism, and war?

Okay, time to take a deep breath...First, let's consider some of what would be involved, for redefining work on monetary terms. Recently, Nicolas Cachanosky of the Sound Money Project wrote why he believed money became necessary, in environments which did not initially require money:

To make an exchange, both parties need to know what the other party has to offer - this is an important limit to potential exchange known as the double-coincidence of wants. One important benefit of using money is that individuals avoid such situations.

The convenience factor of money as coordinator of economic activity, cannot be dismissed lightly. But what happens when individuals and institutions avoid the need for time based coordination, for too long? A problem has occurred, in that complete reliance on money without recognition of aggregate time value, has generated a limited marketplace for time value on its own terms. In particular: for personal wants and needs, some would benefit from the ability to negotiate for services based on mutual wants, instead of settling for the default product settings of institutions. Product choice options on the part of individuals and institutions - in particular for time based services - are not necessarily one and the same.

Without sufficient capacity to personally negotiate for time based product, the lack of a double coincidence of wants spills over into the personal sphere. As individuals lose sight of what is actually involved for economic reciprocity, social reciprocity also suffers. Indeed, reciprocity is not always correctly defined, by those one would expect to be able to do so. Early in the beginnings of this project (thirteen years ago), an acquaintance gave an example of reciprocity as visiting someone in a nursing home. In spite of the disconnect in this explanation, everyone recognizes what happens when people appear incapable of reciprocity. Such individuals may try to force others to do things for them, or else attempt to do everything on their own.

Reciprocity still involves a double coincidence of wants, whether or not money proves capable of smoothing the process of resource coordination. Without a marketplace for time value, some have few means to solve for the inevitable double coincidence of wants that are part of life. And when time based services markets are institutionally defined, the result does not always resemble what people would choose of their own free will. Not only do knowledge use and skill sets tend to be compromised in the "factory" school model, but also the all too similar model of hospitals and nursing homes.

Also, the lack of a free market for knowledge use, increasingly leads to problems at a monetary level. In spite of money's coordination ability in the marketplace, tradable sector organizational capacity is more effective in this regard than the time based services of non tradable sectors. Consequently, there is insufficient room for lower income levels to negotiate for time based product, without a marketplace for symmetrically coordinated time value.

Why so? Asymmetric compensation was not developed in association with the (monetarily represented) resource capacity actually available to fund participating groups, in nationwide systems. Indeed, determining actual value and resource availability in these circumstance would have been next to impossible - hence fiat monetary formation. Instead, valuations for knowledge use (in time based services) were generated which claimed resource capacity before populations as a whole were represented. As governments sought to extend access to skills sets as defined on those terms, the valuations have gradually became burdens on government budgets - even though only a portion of the public is represented for real time settings in services coordination.

A marketplace for time value, could gradually restore the lack of monetary balance which has resulted from these early prior claims for time value. However, the challenge of a time based marketplace is somewhat daunting, given a steep learning curve for smooth negotiation on these new terms. Consequently, many individuals will have to back up somewhat and ask some very basic questions regarding mutual assistance.

One reason free markets have not been possible for knowledge based services, is that many remain afraid of the very freedom such a market implies. In a sense, life would be a lot easier if government could continue its broad role for knowledge use preservation and services coordination. But many governments no longer have the budgets to do so adequately, for much longer.

Megan McArdle, in "Listen to the victims of the free market", noted how the elite have been reluctant to talk about work in any meaningful way, in a post which is worth reading in its entirety. I'll excerpt some highlights, here:

And the giant hole at the center of this discussion we aren't having is work. We talk a lot about how to palliate the effects of a labor market that no longer offers many rewards to the less educated. We act as if jobs inevitably grow like weeds, in the fertile soil of capitalism. Or worse as if they were a sort of optional intermediary step i.e. the important business of distributing money and fringe benefits. Given how central work is to the lives of the elite, how fearful we are of losing our own careers, this belief is somewhat inexplicable. It's also politically suicidal, as the current moment shows us.

She continues:

There is no better example of the folly of the elites than the current fashion for a universal basic income among both liberals and libertarians. Instead of trying to figure out something hard, like how to build an economy that provides adequate work for everyone, the idea is to do something easy, like give them checks.

Let's hope that policy makers in Washington don't eventually resort to checks as a last out. It's worth the effort required, to rediscover work, instead.

Can Education "Grow", as a Services Marketplace?

Formal education at all levels, is facing a series of challenges. Many now question the value of a college degree, as graduates are faced with diminishing returns in the job market. Meanwhile, educators in primary and secondary education continue to seek further revenue, to bolster the chances of success for low income students. A recent Equitable Growth article noted by Mark Thoma, reasoned that students from low income districts benefit from additional funding in programs designed for them. Nevertheless, it's an argument which stands in contrast to a states argument, that throwing money at the problem is no longer working.

Regular readers know that my primary concern is how the marketplace as a whole is already structured. Today's existing work opportunities, can be thought of as part of a platform which is only partially capable of absorbing the personal investment of education. From the beginning of the progressive movement, education as a "social purpose" (rather than personal challenge and practical need), has been too closed ended. However, in fairness to progressive reasoning, institutional formation also responded to a value in exchange economic framework, which had little room for value in use economic definition.

Hence some of the education most needed in the present, would particularly apply in a value in use framework. There are few marketplace opportunities to engage with others in practical or experiential services product, at a personal level. Both production and consumption are compromised in the marketplace, as individuals attempt to coordinate for knowledge use among today's existing institutions.

Invariably, an incomplete platform for work formation in the marketplace, makes it appear that "more money is needed", for what in fact has not worked as planned. Implicit in the "more money for better outcome" requests, is the understandable desire for education to be a growth industry. I am just one of many, who would like for broader educational capacity to contribute to long term growth! That said, more education is not needed just for the sake of more education. More education is needed for a stronger marketplace outcome, than has been the case thus far. And education as a "growth industry" on present day terms, is no longer the way to get there.

"Shifting gears" in this discussion: Not enough attention has been consciously given, to the fact that monetary flows for education (as non tradable sector activity), are mostly to replace already existing asymmetric compensation. By way of example, time bank services are also replacement monetary flows rather than potential growth activity, as noted in the last post. Today's educational compensation exists mostly in a replacement flow category, in that employment capacity was established by associations which assigned compensation value according to their perception of general equilibrium potential. These assignations became a services component of monetary valuations, as national medium of account.

One reason educational compensation can be a notoriously sticky wage (especially for administration), is the fact educational (time based) product is mostly a derivative of preexisting growth. Contrast this to educational product which is (already) capable of contributing to further growth, since product separate from time value can add to marketplace capacity, when cronyism is not involved.

In a marketplace for time value, it is possible for the product of personal time value to achieve the same result. Symmetric compensation (or time matched activity) would generate new wealth instead of drawing from preexisting wealth. Symmetric compensation would provide means for time based educational product to "grow" - not just as a marketplace component but in the more important terms of aggregate growth potential. In other words, growth potential for time based educational product would exist, that need not crowd out other wealth formation. The time arbitrage of symmetrical compensation, would allow time based educational product to escape the derivative or secondary category of wealth creation and monetary flow.

Let's break down the process of educational compensation on asymmetric terms a bit further, in terms of (supposed) economic access. While one hears that a STEM education is more valuable than a humanities education to gain employment, this assumption is nonetheless time and marketplace dependent. Part of the employment result depends on what the marketplace presently needs for STEM, as opposed to job openings in humanities.

Even so, compensation for humanities education, is that which is more clearly limited, in terms of (present) marketplace availability on asymmetric terms. This likely has bearing on the temptation in public dialogue, to discount a humanities education in terms of hiring potential. However, while job opportunities for humanities graduates at times appear equally lucrative to job opportunities for those with a STEM education, this is mostly true in terms of staff replacement within the existing educational structure.

Theoretically, STEM education has a better payoff in terms of job opportunity, because these skills are applicable in the initial wealth structure of tradable sectors. Presently, a STEM education is positioned to be the "logical" provider in terms of potential growth. The symmetrical compensation of time arbitrage, would allow time based product with a humanities perspective, a similar position.

Equal Time Value as a Marketplace Option

William Luther has an understandable response, "On Reimagining Money", to an Atlantic article which has a positive take on time banks. While I mostly agree with his arguments, time value still needs consideration, as means to overcome substantial limits in long term growth potential. Here's William Luther:

Time banks are usually premised on the idea that one hour of labor is equal to another hour of labor. It ignores the simple fact that some people are more productive than others. A heart surgeon creates more value in one hour than a plumber. (Both might replace a valve, but one is literally a matter of life and death.) By failing to take in the varying value of time (i.e. labor hours), time bank coupons offer a cruder record than traditional monies.

Admittedly, time banks do provide a crude monetary record. However, much of their purpose is as a short term response to overly tight monetary conditions. The bigger problem now, is that even when monetary policy is sufficiently accommodating, some regions continue to face problems of monetary liquidity. Especially those which lacked the economic complexity to encourage time banks in the first place.

In the twentieth century, economically sparse regions had more options. For instance: during the Great Depression, some rural residents compensated for a lack of local work by spending their prime working years in prosperous cities. Eventually they would return to the countryside to retire. In the present, it's not always as simple for the great grandchildren of Depression era citizens to continue this strategy.

The lack of economic complexity at local levels, needs recognition - as the long term growth issue it has become. Already existing problems were only exacerbated, by the deprivations of the Great Recession. Worse, some have become willing to blame rural residents for their own lack of economic access, much as blame was assigned to the poor residents of inner cities, decades earlier. Where people once said "get a job", some now say "Get a U-Haul." But does it really make sense to always insist people move elsewhere to find prosperity, especially when so many prosperous places seek to strengthen their own exclusionary walls?

One reason that William Luther didn't find time banks to be a viable employment solution, was the fact that their transaction costs have been too high. Some of these transaction costs represent confusion between broadly available resource capacity, versus the actualities of one's own scarce time. This, and the already existing requirements for special skills use, which impact services as a medium of account in today's marketplace formation. Again, here's William Luther:

I am all for reimagining money. But to do so, we should keep in mind the transaction-cost-reducing role of money.

This is why - in the details of local corporate structure - I have focused on natural divisions between non tradable sector time value (and adjacent asset formation), versus tradable sector activity, as further explained in my last post. In a perfect world, it might be best if no one needed equal time value as a marketplace option for services coordination. But given a smorgasbord of already existing claims on time value, a marketplace for time value would be easier than confronting the reality of sticky wages in general equilibrium. There's also the fact that sticky wages strongly influence asset values, which contribute to the stability of general equilibrium.

What, then, about the more obvious differences in skills aptitude as noted by William Luther? Today's institutions have actually become too efficient in separating the (supposed) wheat from the chaff. The result is an overall negative in terms of time aggregate value, as reflected by a low interest rate environment and low investment. So much aggregate time value has been "set aside", that the workplace "remainder" struggles to maintain broad services coordination, physical infrastructure and social support. Worse, still tight money conditions continue to remove even more "chaff" - albeit in slow motion.

An equal marketplace for time value could also slow the pace, for some who enjoy high skill work but face burnout in a workplace which expects full time commitments for high skills. For instance, healthcare providers are well represented in jobs which carry their own health risks.  Some individuals need means to reduce the repetitive stress, which can lead to unnecessary health problems of one's own. These individuals would likely welcome the introduction of robots to help with high skill repetition. High skill robots would also be a plus for knowledge use systems, which due to low population density would need high quality surgical assistance.

Among the many differences between time banks and a marketplace for time value, is the fact that skills sets would be far more flexible in the latter, and would be responsive toward changing needs over time in ways that group members can readily recognize. Unlike the local currency of time banks which exists solely for services transactions, the local currency of knowledge use systems is a monetary flow which gradually becomes asset stock, for each participant. Eventually, a sufficient degree of wage created stock, makes it possible for participants to gain the option of discretionary income from the monies of surrounding regions.

Sticky Wages in Price Taker vs. Price Maker Context

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

In perfectly competitive markets, market participants have no power.

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

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

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

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

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

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

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

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

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