The Lifestyle Illusion of Working Capital Requirements

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

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

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

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

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

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

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

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

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

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

Aggregate Time Value: Demand, Supply, or Both?

System imbalance between today's tradable and non tradable sector activity, is exacerbated by the lack of aggregate time value for supply, in the latter. An apt example of untapped labour abundance - given a demand dominated role for time value - is the consequent restrictions in housing supply.

Unless time value also serves as an active source of supply, individuals can gradually lose their ability to contribute to economic progress. Such an occurrence is more likely, if governments and special interests choose to limit the economic freedom of time value, as a potential supply function. While time representation as demand remains sufficient in tradable sector activity (via output gains for a full range of product), human capital supply potential is being lost, in today's non tradable sectors.

When human capital is mostly tapped via institutional demand terms, it can become incapable of contributing to full marketplace participation. Even though tradable sector activity achieves production gains via reduced time contributions (the Solow residual), non tradable sector activity inadvertently diminishes the marketplace, with this approach.

In order for time based services to contribute to a more complete marketplace, aggregate time value needs to move beyond the demand management functions it is presently assigned. While managed demand pools for institutional needs are quite valuable, they lose the ability to move economic progress forward, in historical time frames when secondary (wealth dependent) market activity is dominant.

The twentieth century offered ample opportunities to grow the marketplace through pooling for demand management of human capital - both in educational and workplace context. The main reason human capital was able to contribute to long term growth in this arrangement, was its association with tradable sectors which continued to expand output in relation to the increments of time involved. As output has come to be more closely associated with human capital than with tradable sectors, it becomes increasingly important to consider how growth can be achieved on human capital terms. A recent post from Tyler Cowen regarding the compound interest of learning, provides helpful ways to think about the process. He writes:

Compound learning occurs when your new learning, and your new analysis, builds steadily upon the old. Over time, learning is a bit like compound interest and it accumulates. When compound learning is possible, you wish to keep a relatively well-defined set of analytic pieces on the table. It is fine and indeed essential to add to those pieces, but then the new piece should be one that you may learn with it. Furthermore, it should be readily shared with other people...

I was glad to see Cowen highlight the fact that knowledge use accumulates as wealth capacity, through active sharing. However, it can be difficult to secure knowledge gains - even when individuals commit to steady work habits and schedules, when their personal circumstance becomes subject to stresses that make it difficult to maintain or share earlier time investment gains. An institutional framework is needed, which makes a productive knowledge continuum more likely for all who commit to human capital investment, in the course of their lifetimes.

It would be easier to recognize learning as economic processes capable of compound interest, if time were used as a vessel (economic increments) to create a knowledge continuum for individual and group participation. Time value works as a supply side component when the time of one person can build new wealth, through the purchase of time on the part of others - especially to reinforce education and learning as a part of workplace structure.

A time continuum of pooled supply management, much as the learning space of a given individual, gives opportunities for human capital compound interest which are not yet being tapped. Aggregate time as demand, gives opportunities for compound interest in the form of social capital for the group. Nevertheless, this process is associated with individuals who experience only a partial knowledge continuum with today's organizations.

For instance, formal schooling thus far has been a cut off point for an otherwise organized continuum of human capital. It stops precisely when individuals and groups need to start taking advantage of mutual learning gains with one another. Likewise, when firms require non compete clauses, they restrict the compound interest potential of knowledge gains in society - especially when firms can't fully utilize the capacity inherent in any given employee, beyond what takes place in normal workplace hours.

Even though today's institutions contain important elements of compound interest for learning, their present organizational capacity is too thin, to preserve knowledge use in the event of catastrophic events or political setbacks which often disturb important organizational patterns. Fortunately, knowledge use can be preserved via managed pooling for supply functions, to move progress forward, when human capital demand aggregates face the limits of secondary market dominance.

Notes on the Economic Core and Periphery

One feature of present day economic stagnation, is interfirm inequality, which has become more pronounced in recent decades. Much of this has been driven by changes in core and peripheral economic activities which were once included in the same institutional settings. As the economic core of economic activity becomes closely aligned with high skill levels, lesser skills are spun off into separate firms, which consequently feature lower income levels. And since populations now prefer to cluster according to income commonalities, employees of peripheral firms aren't always able to generate common spaces with core firms, where those spaces would still prove beneficial to all concerned.

Much of the separation of core and periphery can be correlated with a growing prominence of non tradable sector activity, in relation to tradable sector activity. Nevertheless, automation in word processing, is one factor which contributed to a substantial amount of firm division, regardless of sector. For instance: In the seventies, I was one of many others who took a chance on office work providing income similar to what a four year college degree could offer. Indeed, in the seventies and early eighties, this was still the case. Hence when baby boomers such as myself lost access to office work with traditional benefits, the new option was periphery firms, in which workers were closely packed in small spaces, with work largely bereft of benefits or reliable full time schedules.

Granted, traditional secretarial and administrative assistant positions, still exist alongside core economic activities. Nevertheless, these jobs are now mostly reserved for individuals with college degrees. Prior to the separation of core and peripheral work, secretaries and other office workers once shared office space, local neighborhoods, and other cultural attributes, with firm management.

Why might the separation of core and periphery be more prominent in non tradable sector institutions? While tradable sector activity separates many production processes prior to final product, non tradable sectors may not need to separate core production processes as frequently. In other words, a wider range of tradable sector firms have more "skin in the game" for wealth creation, since product components are built at multiple locations. Spreading production responsibilities more equally, means the possibility of less income divergence, across tradable sector firms.

Unfortunately, wealth redistribution isn't so simple, when product is more closely defined as knowledge or skill. When final product value is closely held, firms are more likely to keep the most important (core) activity in single settings, while contracting for work not essential to final product. Hence wide income differentials become segmented by company definition and job function.

Decades earlier - once opportunities for secure office work diminished - it was an easy decision for me to abandon peripheral office work for more lucrative options. Today, however, potential employees may refuse peripheral work for different reasons entirely. Again, geographic income clustering presents a coordination problem, since low income clusters usually travel further to reach work locations. Hence transportation issues figure prominently, in the personal reservation wage of potential employees.

More peripheral functions are likely to be automated over time, for firms which find it difficult to hire and retain workers close nearby. Consider also, why the revenue dependence of non tradable sectors makes it more difficult to redistribute income, given the level of compensation necessary for employees who committed to extensive human capital investment via their own means. Only remember that this form of organizational capacity has to reimburse human capital input which is not internally generated.

When firms can't find the skills they need, it helps to consider the overall economic circumstances. Demand for specific human capital has shifted over time, to what is not as widely available via formal education, by definition. In other words, the skills these institutions still need, are not broadly represented by existing educational institutions for good reason. To prepare for skills in current demand, is to suggest more educational provision of these skills, which in turn makes the effort less of a strategic advantage, over competitors.

Problems such as these in both core and peripheral organization, also suggest a level of system fragility. Too little skills capacity is actively being sought, for nations to feel confident about their economic futures. The separation of core and periphery, while an understandable response to general equilibrium demands, no longer offers system wide possibilities for full employment.

Tradable sector activity has been able to share income and benefits more broadly, in part because integral parts of production have been divided among different participants in the process. Also important, is the degree to which resource capacity for inputs and outputs alike, is internalized. Fortunately, time arbitrage could also internalize inputs and outputs for time based services, so that more participants would ultimately be able to share in the benefits of the entire process. Given how populations prefer to cluster in similar income groups, it is becoming increasingly important, to generate non tradable sector organizational patterns which are aligned for a full range of local skills capacity.

Labour Abundance is Impacting Middle Class Dynamics

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

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

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

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

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

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

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

Time Value as an Alternate Equilibrium Lever

In the economic conditions of general equilibrium, time based product lacks the economic leverage, which local group management could otherwise provide for service creation. Presently, personal time preferences are not a marketplace consideration. In other words, time - the one resource we all share via the same provision - still lacks the economic representation, which would allow it to contribute to aggregate skills preferences.

When skills are not coordinated within an understandable time continuum, skills product cannot be readily stored for either current or future use. Since would-be providers don't know the actual time product preferences of would-be consumers, considerable skill potential and human capital investment slips away. If time value were a valid marketplace construct, perhaps it could be considered a power law form of leverage. As Shane Parrish (of Farnam Street) writes:

A power law is a relationship between two things when a change in one can lead to a large change in the other, regardless of the initial quantities. In the case of leverage, a power law relationship exists between the effort exerted on the lever (actual or metaphorical) and the outcome.

Notice his emphasis on quantities, which in this instance applies to both skill and knowledge. Plus, consider how much easier it can be to measure the time context for skill and knowledge use, than to measure the actual skill or knowledge which is applied to individual circumstance. Parrish also highlights the book "Decision Making", in which Alan C. McLucas discusses the importance of leverage:

Leverage is built on the notion that small, well-focused actions can sometimes produce significant, enduring improvements if they are applied in the right place. Tackling a difficult problem is often a matter of seeing where the leverage lies.

...a leverage point is where a small difference can make a large difference. Leverage points provide kernel ideas and procedures for formulating solutions. Identifying leverage points helps us create new courses of action...

With time preference as a lever, knowledge use and skills capacity could coalesce around a common supply and demand structure for time based product. When time coordination is applied in a continuum to both human capital investment and output measure, it becomes possible to manage services creation, so as to mimic the internal wealth creation processes of tradable sector production. Even though time based product can only be "stored" for the future to the degree that participants are simultaneously available, the system works to make these possibilities a greater likelihood, than is the case when time based product is approached via the external coordination of general equlibrium.

The ways in which we wish to apply our economic time with others, are just as important as what we ultimately apply our time to provide on their behalf. We gain personal leverage, for instance, when we mutually coordinate for both leisure time and what we know to be our most productive moments of the day. By allowing individual and group time preferences to act in concert, as a lever for skills actualization, we gain more productive means to manage skill capacity. Indeed, far too much skills capacity has been lost, given the limited human capital investment which is actually tapped by today's institutions.

Voter "Stupidity"? Or Poor Democratic Options?

What ever happened to the reasoned logic of professionalism, given the rise of populism? Hmm, what indeed. Even though I have my own concerns about growing populism, it's hard to remain convinced that elites have the "answers". After all, the groups which hold the most power, are responsible for a now lingering economic stagnation. Does anyone wonder why the populists are in full revolt?

The uncertainties of populism, make it easy for some to blame "too much democracy" and "stupid voters" for society's ills. In a recent Brookings essay from Benjamin Wittes and Jonathan Rauch, they complain that people only want more direct democracy over time, even though these processes have not worked out well. They argue that "the best way forward is to rebalance the reform agenda away from direct participation and toward intermediation and institutions."

Ilya Somin responds, and notes that he agrees with much of their analysis. He writes:

In particular, they are right to conclude that political ignorance and irrationality are dangerous menaces that are unlikely to be cured by increasing political participation, greater access to information, or other conventional remedies.

Even though Somin wasn't convinced that empowering political professionals could counter voter ignorance (not to mention the strong incentive to exploit ignorance), he lacked a clear alternative, other than the ability of citizens to vote with their feet in the marketplace.

Yet poor voter options for the resource capacity that matters most, is precisely the problem. Political professionals and the elite have slowly, but surely, diminished marketplace vitality and economic progress. Given this unfortunate reality, voting with one's feet, too often means walking away from basically all the choices on offer. For instance, consider how many individuals are now held in jail for not paying their medical bills. How, exactly, does that "public service" help anyone? Seeking a doctor when health circumstance gives one cause for fear, isn't exactly on the scale of robbing a bank. Yet in some states it is treated as such. Hence the main lesson for many rational folks, is to think twice before opting for healthcare services.

Given how the "non stupid" have made a travesty of what were once free markets, I'm not ready to call voters stupid - regardless of the conspiracy theories that are encouraged - while irrational force is used to maintain today's marketplace structure. When the validity of the voting process is questioned, this gives professionals more reasons to double down, on mistakes that have already been made. Again, I blame arbitrary limits to knowledge use for much of our present political problems, more than any supposed stupidity on the part of the average voter.

It's time to quit pretending that the supply of healthcare was somehow handed down on a stone tablet, for doing so makes all of us appear far more stupid than we actually are. At root of today's political turmoil, lies the artificially restricted supply of knowledge use. In the meantime, instead of having democracy as a valued tool to coordinate healthcare provision and consumption, we are reduced to political shouting matches and aggressive threats against the "wrong" constituency.

None of these potential issues for production rights were lost on our country's founders, either. They were greatly concerned about the tyranny of the minorities who could effectively reduce the production rights of citizens, over time. Let's not forget what they understood. There is still time to generate production reform, on behalf of the average citizen. Nothing less than the prosperity of nations, is at stake. Everyone deserves a better framing in which to cast their votes. A framing which doesn't require making stupid decisions, such as who supposedly doesn't "deserve" the useful skills of others.

Preserve Economic Time Value, Not "Guaranteed Jobs"

In response to a proposal to address job creation from the Center for American Progress (HT Marginal Revolution), Adam Ozimek notes that "Guaranteeing Everyone a Job is Harder Than it Sounds". He writes:

The plan lists several jobs that apparently are a good fit for the currently non-working and also in high demand: home care workers to aid the aged and disabled, affordable child care, teacher's aides and EMTs. So the basic plan, if I understand it correctly, is that the federal government will pay for jobs for people to work in the public or private sector, and the government will pay for training as needed.

Crowd out is obviously a big problem here. Will the employers being paid to create these "guaranteed jobs" actually create new jobs or just replace existing ones? Or perhaps they will "create new jobs" that were going to be created anyway...The incentive to crowd out is strong for local government especially. The CAP piece justifies the demand by pointing out that many local governments are "cash strapped".

There are delicate equilibrium balance issues at stake. Consider also, the fact local governments have already scaled back hiring out of necessity, in response to existing local pension obligations. Again, we are faced with what could be considered a"mature" general equilibrium which does not have room for all comers on the same sets of terms. The basic template of this equilibrium for economic participation has many interconnected features, which presently lack the flexibility to respond to major shifts in existing resource capacity.

It has proven difficult to discuss new economic possibilities, in part because economic access in general needs better framing. Alas, for populations to maintain the social cohesion that was (largely) possible in the twentieth century, we need continual efforts to improve the production and consumption potential of our non tradable sectors. This, instead of ever more calls for income gains which can only stretch so far, when basic resource flow patterns have long since been committed.

When economies were primarily based on expanding tradable sector output, the drumbeat for ever more income gains perhaps made more sense. But once economies become increasingly focused on time based services, everything about the basic structure of output begins to change. Ultimately, that also translates into less of the traditional output which once meant broad wage gains. An important aspect of this historically recent development, is the fact not everyone can productively engage, on today's government/private sector dictated terms.

Yesterday's middle class was built on strong tradable sector output. If that prosperity is to be continued, most aspects of output potential for non tradable sector activity, will need close examination. Meanwhile, the recent article from the Center of American Progress ("Toward a Marshall Plan for America: Rebuilding Our Towns, Cities and the Middle Class"), almost feels as though an audible sigh and wish, that people who didn't complete their college degrees (such as myself, though I didn't vote for Trump), didn't have these problems to begin with. The authors wrote:

The truth is, progressives should be as concerned about the declining fortunes of those who do not go to college as any other group. Not because they are disrupting politics - though they are - but because they are our brothers and sisters too.

Once, long ago when Obama was voted into office, I wrote letters to him, detailing the plight of rural America. There was no response. Sometimes I wonder, had I finished the college degrees I so wanted, would I be a progressive, today? The answer really isn't important. But degrees would have meant having the option of city life in these later years, and progressive friends as well.

We need to preserve economic time value for all concerned, instead of trying to guarantee jobs to the ones who have been left behind. Fortunately, even though jobs are a cost, it is not necessary to define all costs on what have become expensive technocratic terms. Once we step outside the weak tea of "make work" and artificial service roles, we can remember the concerted efforts people have always been willing to assume - either because those work efforts are perceived as necessary, desirable, or possibly, both.

Both constructs suggest a world of worthwhile work, which because there is a lack of suitable framing for economic time value, ends up defined as not feasible or possibly just "unimportant". Yet understanding the difference between personally initiated versus externally mandated work, is important, for time value to gain economic legimitacy. People want to be responsible for themselves and for others, in ways that matter at a personal level. Why not approach a revitalized economy on these terms?