Thoughts for August 14, 2022
Good afternoon. This week’s topics are working hours and growth, the Inflation Reduction act and Keynesian, and the High Middle Ages.
Working Hours and Growth
I would like to highlight this paper, by Manfroni et al., which came out last year but of which I only recently became aware, that discusses time allocation as a constraint to economic growth. Although I am not fully convinced of all its conclusions, there are many valuable ideas here.
As far as bottlenecks to economic growth go, industrial history, and our understanding of economics, can be considered to have passed through two major phases. The first, which developed in the early 19th century with economics as a discipline and remained predominant until the Great Depression, holds that the bottleneck is on the supply side. Demand would take care of itself; Say’s Law, which holds that general gluts should not occur, is a key concept. In a simplified form, “supply creates its own demand”.
The Great Depression posed a severe challenge to this doctrine. Economists and policymakers tried to understand how there could be widespread unemployment and idling of factories, and since there was clearly a large amount of productive capacity that had been chronically idled, old economic dogmas seemed inadequate. In response, John Maynard Keynes and other economists of the era developed new models that emphasized demand, rather than supply, as the more relevant constraint. The policy response was to stimulate demand, which as noted last week has liberal (government spending) and conservative (tax cuts) variants. This has been the dominant view in American policymaking since President Franklin Roosevelt pursued a budget of spending without tax increases in 1938.
But Keynesian also ran into trouble, particularly with the stagflation episode of the 1970s, since that model was not able to offer a good explanation of how economic stagnation and inflation could occur simultaneously. Nevertheless, I think it is fair to say that neither academic economics nor policymaking has moved to a credible successor to Keynesian.
Enter this paper, which posits that limitations in human hours have displaced demand as the operative constraint. According to their model, as economies become wealthier, a larger share of time goes to leisure—declining working hours—and a large share of working hours go to fulfilling consumption. Therefore, the surplus that would go to capital investment decreases. According to the model, the surplus will eventually shrink to zero and become negative, meaning that economic growth will cease and turn into decline. It is posited as an explanation for the tepid economic performance of wealthy countries over the last 50 years. It is not clear to me whether this model is better considered a return to a pre-Depression understanding of supply-side bottlenecks, or if it should be regarded as a new state of affairs.
The paper is published in Ecological Economics and comes very much from the ecological economics tradition. In the introduction, the authors place it as complementary to Malthusian models, which hold that external constraints—sources, such as availability of land, energy, minerals, etc.; or sinks, such as the environment’s capacity to absorb greenhouse gases, biodiversity loss, etc.—are the operative constrains to the economy.
Nevertheless, I find it useful to formulate a pro-growth critique of consumerism. Most critiques of consumerism that discuss economic growth at all do so from an anti-growth perspective (see this as a typical exemplar of such thinking). This view makes sense from a Keynesian perspective, from which, since demand is the economy’s operative constraint, consumerism bolsters demand and thus economic growth. But under the model of Manfroni et al.—and under common sense in my view—consumerism is a sink, not a source, of economic activity and serves to depress economic growth.
The authors pose three solutions, but stress that they can only be temporary and local solutions:
i) increase capital investment to boost labor productivity in the productive sectors,
ii) externalize working hours through imports,
iii) immigration of economically active people.
I see why the second and third solutions can only be temporary and local. Since there is no trade or immigration between Earth and other planets, the sum over all countries of net imports and the sum of net immigration must be zero. Furthermore, net imports and immigration should, in the long run, flatten the wealth gradients that give rise to these phenomena. However, I don’t understand why the first solution cannot be a global and long-term solution. It seems that, at least in theory, there remains potential to increase labor and resource productivity through investment and technology, as well as increase the availability of labor and natural resources, and all four by orders of magnitude.
There are pro-growth political movements that seek to increase trade and immigration and reduce overregulation, and there are some green shoots of pro-natalist movements. But I am not aware of an anti-consumerist movement from a pro-growth perspective, and I have great difficulty imagining that such a movement could gain traction. Yet if I am reading the paper correctly, that would be the most relevant pro-growth movement. Furthermore, if such a movement did gain traction, would we find ourselves again constrained by demand?
Inflation Reduction Act and Keynesian
Pardon me if it feels like I am beating a dead horse. The IRA is, however, a very good exemplar of what I mean by Keynesian being the dominant economic theory in policymaking. The point is made explicit in this Twitter thread and this article. The IRA has mostly eschewed any form of carbon pricing in favor of investment in clean energy technologies, primarily through tax breaks and subsidies. The hope is that these technologies will proceed to displace fossil fuels in the absence of a market signal about greenhouse gases. However, as I noted last week from the Repeat Project’s analysis of emission reductions, projections of reductions do not account for several important factors, such as transmission capacity and workforce availability, which if accounted for might double the cost of carbon abatement, causing the cost to exceed mainstream estimates of the social cost of carbon.
Why, despite the numerous weaknesses of the Keynesian model, does the approach of subsidies and tax breaks persist? This might seem fairly obvious, and indeed, the aforementioned thread says the quiet part out loud.
Even Citizens Climate Lobby, an organization that heretofore had been laser-focused on a carbon fee and dividend, put its prestige behind the IRA. I saw the same thing with the YIMBY movement, which beyond its stated objective of liberalizing zoning, embraces ineffective or counterproductive policies such as tenant protection, rent control, and housing subsidies, all also out of transparent political expediency.
I fear the United States will remain trapped in increasingly ineffective Keynesian solutions for as long as it is possible fiscally to sustain this approach. Judging from the alarmingly high debt level, that might not be too much longer.
High Middle Ages
Last night I finished Philip Daileader’s series on the High Middle Ages on The Great Courses. The series was quite good. Although I can say only a fraction of the things that I would like to say about it, here are some of the highlights. Since I am interested in some particular things, a different viewer would make a very different list of highlights.
The most important development of the High Middle Ages (AD 1000-1300 in Western Europe) is that population doubled. This, together with technological advancement and urbanization, greatly increased wealth.
Noble violence was a serious problem. Attempts to deal with it included the relatively ineffective Peace and Truce of God and the more effective chivalric code, so that by 1300, noble violence had somewhat been tamed.
Relatedly, the fragmentation of Europe into castellans, particularly Germany, was a major problem.
Life for peasants was quite bad by modern standards, but serfdom was a major step up from Roman slavery, which had largely disappeared during the Middle Ages. The position of serfs, relative to lords, improved from 1000 to 1300, in contrast from what one might expect from a Malthusian reading of population trends.
Urbanization was an important vector of rising living standards. A townsperson could expect a higher standard of living and more freedom than a peasant. The growth of towns and cities also gave peasants more bargaining power.
There were several attempts to reform lax standards among the clergy, of which the Franciscans were the most successful and notable.
Heresy was (from the perspective of the papacy) a growing problem, and unlike the later Spanish Inquisition, medieval inquisitions were church-led efforts to combat heresy. These inquisitions obviously don’t meet modern standards of human rights, but they were not as zealous as often imagined.
Although it didn’t survive to the modern era, Scholasticism was a surprisingly open method of inquiry that played a central role in high Medieval intellectual life. However, I would have liked more discussion of how medieval intellectual trends informed modern ones.
Daileader is an engaging story teller as well. If you think modern politics are crazy, watch his lectures on the First Crusade.
Dynastic luck played a major role in the development of a strong French state, French royal absolutism, and English parliamentarianism.
It is frequently imagined that the Church enjoyed decisive superiority over the kingdoms of western Europe, but this was not the case. In the Investiture Controversy, for instance, Frederick II Hohenstaufen of Germany and the papacy fought for 50 years only to a temporary compromise in the Concordat of Worms.
Much, much more.
Before I watched these lectures, I had the view that the Middle Ages, particularly the time after AD 1000, should be regarded as part of the long process of modernization. This view is associated with Charles Homer Haskins, an early 20th century medieval historian whose most influential work was The Renaissance of the Twelfth Century. I still have this view, but also some more appreciation for the discontinuities between the medieval and modern worlds.
I continue to highly recommend Daileader’s series on The Great Courses. The next and final series is on the Late Middle Ages (1300-1500), which I am very much looking forward to.