Economic Restructuring Caused of the Recession

Or so Arnold Kling says. I’ve referred to his “patterns of sustainable specialization and trade” argument before, but not in much detail. Here’s Kling explaining it in a At least that’s what post from last January.

…I want to get away from thinking of economic activity as spending, and instead move toward thinking of it as patterns of sustainable specialization and trade. Even if there is only a small chance that this alternative paradigm is useful, I think it is a worthwhile exercise.

One reason for wanting to change the paradigm is that I believe that trying to describe economic activity using an aggregate production function is a mistake. When I use the derisive expression GDP factory, I am referring to the aggregate production function.

The advantage of the aggregate production function is that, when combined with a sticky nominal wage, it yields an aggregate supply curve. This allows macro to be presented using the familiar tools of supply and demand. My problem is that I think that the GDP factory is a bogus story that obscures rather than enlightens.

Instead, I think that the right tools to use for macro are the two-country, two-good models of international trade. The “two countries” could be two sectors within an economy. The agricultural sector and the urban sector. The housing sector and the non-housing sector. And, of course, there are many more than two sectors. But just talking about two sectors is a big improvement over the GDP factory.

At full employment, both countries are taking advantage of specialization and trading with one another. When something happens to adversely affect the pattern of trade, some workers shift from market activities to non-market activities, mostly in the form of involuntary unemployment. Gradually, new patterns of specialization and trade emerge, and full employment returns. That is what I have been calling the Recalculation Story…

More comments below.

1. The conventional “spending” paradigm (which includes both monetarist and Keynesian versions of AS-AD) says that output is “lost” during a recession. That is what is meant by a term like GDP gap, the shortfall of GDP from the level it would be at full employment. (Yet people sometimes speak of under-consumption. We under-consume, and yet there is a shortfall in production. Strange, no?)

I want to suggest that the output that is “lost” is output that people do not want. In 2008 and 2009, Americans do not want 2 million houses to be built. So I do not think that it is right to speak of a shortfall in output. Instead, we should say that the people who were building houses have not found a pattern of trade in which they can produce something that people want.

2. I think that technological change can drive the marginal product of many workers close to zero (When I mention ZMP, I always feel I owe Tyler Cowen a footnote.) I suspect that this happened in agriculture in the U.S. in the late 1920’s and early 1930’s, dumping a lot of manual laborers into unemployment. I suspect that it has happened in recent years because of the Internet. The Internet has created many new white-collar occupations, but by the same token even more white-collar workers have seen their marginal product fall to zero.

Eventually, the mix of workers changes, mostly due to older vintages dying off and newer vintages appearing. New trading patterns develop, we see a decline in the number of workers with low marginal product, full employment is restored, and productivity and earnings are much higher than before.

3. I wonder if the real public policy issue is not restoring full employment but coming up with a fair distribution of leisure. That is because with high levels of productivity, it is arithmetically possible to sustain a high ratio of dependents to workers. However, this is not easy to come to terms with politically. The dependents may suffer from low self-esteem. The workers may feel resentment.

I would expect that advances in productivity will increase leisure. One could argue that this is already happening. Actual retirement ages (as opposed to statutory ones) are falling, even as longevity is increasing. (I am speaking of the dominant trend, notwithstanding whatever brief disruption might have been caused by the financial crisis.) The age at which young people are expected to “settle” into adult life styles is rising. Even for people with “regular” employment, there are many jobs that include a large leisure component, including surfing the Internet and chatting up co-workers.

It could be that when the unemployment rate falls back closer to 5 percent, what we will have is a distribution of leisure that makes people happier. More young people will be experimenting with their lives (traveling, changing fields, trying to start businesses), more people will be retiring early, and only in between will most people by working at normal jobs.

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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2 Responses to Economic Restructuring Caused of the Recession

  1. Dr X says:

    I have no problem with the idea of patterns of sustainable specialization or with the notion that these patterns undergo recalculation. Frankly, I’m a bit confused about why this is presented as an entirely different paradigm. These are ideas I took away from macro when I was in college, though I admit that it could be that I saw these ideas in what I was learning because of the Austrian-influenced reading I’d done prior to that time. Still, I didn’t see any contradiction with what I was learning.

    As for aggregates, GDP for example, it seems quite evident that the rise in GDP during WWII, was not proportionately reflected in the quality of life Americans enjoyed at that time. At home, many goods were rationed. And those serving in the military were eating shitty food, working in unpleasant to horrific jobs. Producing bombers, tanks and rifles to fill government orders can raise GDP while reducing quality of life. It doesn’t seem that one needs to be a genius or a paradigm shifter to recognized this, consider it and qualify discussions of GDP. I really believe that economists get that, even if they don’t explain it most times when they discuss GDP. When I talk to friends and colleagues, we don’t offer qualifications, limitations and explanation every time we talk about constructs we all know about. We’d never be able to have more complicated discussions if conversations were burdened by these requirements. We’ve actually had conversations about the problems of our intellectual shorthand when we’re talking with or in the presence of people in our field.

    As for recalculation of specialization, I see this as something ongoing, apparent in transitional unemployment. It’s happening all the time, because no pattern of specialization is indefinitely stable and sustainable. What’s new in that? Horse and buggy makers, blah, blah, blah.

    But is this really the best explanation to describe our current difficulty. Sure, the technological shifts Kling mentions may lead to structural shifts over a period of time, radically affect patterns of specialization and leisure. With accelerating technological development, patterns shift more quickly. Patterns of pre-industrial agricultural specialization and trade lasted much longer than specialization, say, in the TV set industry. Television repair services, for example, thrived from the 1950s until maybe the mid-late 1970s when tranistorization made television performance much more reliable, and new technological developments made television sets more disposable simply because of the rapid rate of ongoing obsolescence.

    But is this really explain what happened between October 2008 and the spring of 2009? Had pent up inefficiency of specialization patterns suddenly break the old patterns, causing a rapid and steep rise in unemployment across many occupations? Was the rapid onset of the Great Depression the result of small agricultural operations becoming obsolete in an instant, or did the shifts in agricultural patterns of production actually occur more slowly over decades, gradually eliminating the small farm operation?

    I just find it difficult to believe that from the fall of 2008 to the spring of 2009, that markets suddenly recalculated specialization because of technological innovation. How about the collapse of credit and lending, people no longer able to borrow from their highly leveraged real estate, and yes, as result, they stopped buying at on credit. Bank lending rules tightened considerably because of the banking crisis. Aggregate demand collapsed and businesses laid off workers at a rapid pace, and aggregate demand fell more because more people had reduced incomes. More people with reduced purchasing power, means less buying and less production must follow to keep inventory from accumulating. This seems a much more plausible explanation for the rapidity of the unemployment increase than specialization recalculation that continuously occurs in technologically advanced economies.

    That we recognize the profound effect of the collapse of demand because of the credit crisis, doesn’t mean we don’t also recognize that there is always recalculation operating in the background. These aren’t mutually exclusive phenomena.

  2. D. C. Sessions says:

    In short: structural unemployment.

    In a labor market, the implication is that from one year to the next the market made a radical shift away from requiring one type of labor to requiring another. And this manifestly did happen in 2006: housing starts dropped like a stone, but exports rose equally and unemployment stayed more or less flat.

    Then in 2008, something else happened (what?) and unemployment skyrocketed.

    Structural unemployment is a exactly what you’re describing: the demand for labor doesn’t match the available labor. Too many hedge fund managers, not enough trauma surgeons. Things like that. And what markets do when there’s a mismatch of supply and demand is signal the change through prices (prices are the hormones of the market.)

    It’s not hard to spot structural unemployment: the going wages in some fields drop, and in others they rise. The market adapts by retraining and by shifting the skill sets of incoming workers. That’s why we have very few American students going into engineering: the market has signaled to them that it’s a low-status occupation that requires lots of study, has mediocre pay and minimal job security. Fair enough; Wall Street is making better offers, so off they go to be quants.

    So we can easily enough tell that we’re in a structural unemployment situation: find the hot fields. Who can’t fill openings for love or money? What are the hot majors for college recruiting? What are the recruiters looking for in new grads?

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