Friday, January 6, 2012

John Carney Replies

In the comments section, John Carney has replied to my earlier post with regard to his view on unemployment. I reproduce his response and then offer a rejoinder.
Bob,
I know [sic] see a a critical difference between your outlook and mine. You see market processes as a panacea for the economy, much the way statists see the government as a panacea. 
I don't think we have easy solutions to life's problems. Market processes may be the best we have available but that does not mean things like unemployment go away just because we do away with intervention.
There's nothing in Austrian economics that suggests otherwise. Unemployment can indeed arise, even at high levels, because of natural shocks, shifts in consumer behavior or technological innovation. 
For example, suppose all the lobsters of Maine die out. Or consumers suddenly decide that lobsters are disgusting. It doesn't really make a difference whether it is a supply or demand shock.
In any case, the lobstermen are now redundant. They have skills for which there is no market. They must now take jobs that demand no skills, perhaps leaving their homes in search of unskilled labor.
But note that nothing in this story means there is a demand for more unskilled labor anywhere. So these new workers must necessarily compete against the already in-place unskilled workers. 
This might have the effect of pushing wages down. On the margin it probably will. But employers face non-wage related costs of replacing experienced workers with new workers, including the cost of uncertainty about the ability of the new workers. 
What's more, wages can only go so low. They are greater than zero-bound. In fact, they are bound at the level of subsistence. Workers who cannot afford to eat will not work. This is not caused by government intervention but by human action.
Doesn't it strike you that unemployment can arise in this situation, without any government intervention? Or do you think this is somehow impossible? 
Do you not regard this as at least unfortunate? That the once proud lobstermen now reduced to poverty and most likely unemployment strikes me as a social evil. It may, perhaps, be a necessary evil if the solutions would inflict greater evil. But why not at least admit it is a bad result.
I think your view that no bad results can arise from market processes lets you off too easy. It is harder, nobler, and takes more courage to defend markets that are not perfect and do not always result in progress.
I think it is also better tactically. To most people, the claim that unemployment is not a social evil makes you seem cold-hearted. The claim that unemployment cannot arise but for government intervention makes you seem out of touch with reality. I understand that you are neither of these things, that you have good reasons for holding these positions and good intentions, but I am not the one you need to convince about the justice of market processes.
For those of you who don't know, I regard Bob as a friend and an ally. He's frequently promoted the writings of me and my brother, Tim Carney, on EPJ. I think EPJ makes a valuable contribution to our public debates about politics and economics. So I hope my comments here will be read in the friendly spirit in which they are offered.
As always,
John Carney

Hi John,


You mention that unemployment may rise to high levels, but then use the example of lobstermen who find themselves unemployed. This a case of specific unemployment and not broad-based unemployment, but allow me to discuss this situation for a moment.


I never intended to give the impression that unemployment can never exist. Under the circumstances you outline, the lobstermen would surely be unemployed while they searched for new jobs. Indeed, in my original post I made it clear I was talking about long-term unemployment:
 Long-term unemployment is the result of two factors: minimum wage laws and unemployment "insurance" payments... I see no other factor that can cause unemployment (outside of some very short-term unemployment when a person searches for a new job)
But, more important, I do not deny that at times unemployment can become massive: 
We see clusters of unemployment in economies at times when a central bank exists and manipulates the money supply, which results in the boom-bust business cycle. But this has nothing to do with "capitalist economies" and everything to do with central banks. During the bust phase, sizable unemployment occurs because the economy is going through a readjustment phase following the distortions caused by central bank money manipulation during the boom phase. But even this unemployment would clear up fairly quickly, if allowed to do so. The unemployment tends to linger only as a result of the minimum wage laws and unemployment "insurance" payments which hinder the readjustment process from taking place.
But back to the lobstermen, you write that lobstermen may not be able to find jobs. You start off first by writing:
 In any case, the lobstermen are now redundant. They have skills for which there is no market. They must now take jobs that demand no skills, perhaps leaving their homes in search of unskilled labor. 
But note that nothing in this story means there is a demand for more unskilled labor anywhere. So these new workers must necessarily compete against the already in-place unskilled workers.
But, you then write:

What's more, wages can only go so low. They are greater than zero-bound. In fact, they are bound at the level of subsistence. Workers who cannot afford to eat will not work. This is not caused by government intervention but by human action. 
Doesn't it strike you that unemployment can arise in this situation, without any government intervention? Or do you think this is somehow impossible?  
Do you not regard this as at least unfortunate? That the once proud lobstermen now reduced to poverty and most likely unemployment strikes me as a social evil. It may, perhaps, be a necessary evil if the solutions would inflict greater evil. But why not at least admit it is a bad result.


The first part of what you write has some truth. The basic supply and demand curve teaches us that as supply increases, the price falls, but it nowhere says that the demand curve would simply disappear for some workers. That would make no sense. If for example, there is an economy with 10 workers, each earning $100 per week, if nothing else, if another 10 workers appear on the scene then revenue for the 20 workers would be $50 per week. That's how supply and demand would adjust to an increase in the supply of workers. But, before you charge me with being harsh and not caring that the pay to workers has declined, please keep in mind that the consumers of lobsters now have more funds with which to increase their demand for other products, since they are no longer purchasing lobsters. You completely fail to consider this part of the equation.

Net, net, when demand shifts down in one area, it increases in another. As for your argument that there is a zero-bound to wages and that workers can't work who are starving. In one sense, I agree with you that this is a natural lower bound to wages. But, I think it has little to do with a plentiful country such as the United States, But further if anywhere, I see a bunch of men starving and I am an entrepreneur, I obtain land and put these men to work on the land and pay them a portion of what they are going to produce.

So I just don't get how market unemploymnet is a "social evil". If lobsters die off or people lose their appetite for lobsters, it is true that lobstermen will be out of a job as lobstermen, but entrepreneurs will be out attempting to find new work for these men immediately. Where is the evil?

In my view, the problem in the United States is not one of wages plunging to starvation levels, if we remove minimum wage laws. Rather that many now who can not find jobs, starvation or otherwise, will at last be able to join the job market. In other words, the removal of minimum wage laws, removes evil.

The highest level of unemployment is among black male teenagers. Because they are not employed, their income is indeed zero. If the minimum wage is lowered, they will finally get a job and learn basic jobs skills and certainly have more money in their pocket than they do now.

The government is who failed these youth in the first place by failing to give them a decent education, now the government is pricing them out of the jobs market as a result of minimum wages. That's evil!

Finally, John I would like to comment on your opening paragraph where you write:
  You see market processes as a panacea for the economy, much the way statists see the government as a panacea. 
I see a huge difference between the way I view the economy and the way statists do. 


My view of the great beneficial powers of free markets is based on understanding the deductive reasoning of the implications of how man acts, as outlined by the great economists, Ludwig von Mises, Friedrich Hayek and Murray Rothbard. I see the statist view as making significant errors in their thinking. 


If you are attempting to imply that my belief in the market process is somehow mystical, you are wrong. Starting from the premise that man acts, by deduction, I can prove out the superiority of free markets. I am not shouting out "free markets" without the ability to logically back up what I say.


John, we'll have to go over this more the next time we have a beer.



23 comments:

  1. Great post. Evil is certainly not a word I would use to describe any part of a system made up of voluntary exchange. What John Carney seems to ignore is the fact that any entrepreneur who creates jobs and employs people is doing so of his own volition. He is taking a risk which is by no means required of him at all.

    Many people who speak ill of the free-market speak about jobs as if they are a right. They are not. In the market(the free part of it that is) a job is created for someone when another person puts their property, time, and energy on the line. Again, an action that is not *required* of anyone at all.

    The awesome part of the market is that there is a motive to profit and improve ones situation(on all levels-not just the entrepreneur). This is human action. It is an unstoppable force of good, not evil.

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  2. "You see market processes as a panacea for the economy, much the way statists see the government as a panacea. "

    This is the number one argument I hear from interventionists decrying "Social Evil".

    Most rational people understand that the "free market" is not a pancea, it's just the best option in a world that will always have unemployed, uneducated, poor, etc.

    Though I'm an agnostic, I happen to agree with the Christian notion of us living in a "broken" world to some extent. But as Freidman said on Donahue:

    "Is it really true that political self-interest is nobler somehow than economic self-interest? You know I think you are taking a lot of things for granted. And just tell me where in the world you find these angels that are going to organize society for us? Well, I don't even trust you to do that."

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  3. Why doesn't Mr. Carney set up his own private unemployment/retraining insurance company?
    Sounds like it would be lucrative.

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  4. John also seems to subscribe to Marx's Iron Law of Wages which incorrectly holds that wages tend to trend downwards to sustenance level. The problem is that he doesn't note that (1) capital allows unskilled workers to produce and thus earn more and (2) greater production leads to an increase in real wages even if nominal wages fall.

    As far as the re-training and search costs, I think he has a point that us Austrians too often dismiss with a waive of the hand instead of addressing it more directly. There's a lag between getting laid off and getting a new job that causes short-term hardship.

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  5. Another neglected aspect is the fact that, if wages are allowed to drop to a natural level that happens to be below the previously mandated minimum wage, employers/entrepreneurs are now able to be more competitive in their pricing which results in lower prices to the end consumer thus increasing their purchasing power.

    If you combine that with a an honest, free market money the purchasing power is more stable over time resulting in more savings and a higher standard of living for all. The benefits of free markets are much too numerous to list here but that should give people an idea.

    Finally, minimum wage laws rob the rights of the man who wishes to work for less but is prevented from doing so. He is restricted from being competitive in offering his labor and skills resulting in unemployment.

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  6. Wenzel:

    Excellent Response!

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  7. "If for example, there is an economy with 10 workers, each earning $100 per week, if nothing else, if another 10 workers appear on the scene then revenue for the 20 workers would be $50 per week. That's how supply and demand would adjust to an increase in the supply of workers. "

    This just isn't correct. It's too simple. There are very likely costs--including the cost of hiring people you don't know-- that are involved with hiring new workers that will prevent the market from operating this smoothly. For one, people aren't commodities and so one person isn't the same as another. It's not like doubling the amount of apples picked for the season.

    This means that unemployment can persist for far longer than, say, an over-abundance of other, interchangeable goods would.

    I don't think the solution to this is socialism or a Job Guarantee. I think the solution is something more like private unemployment insurance, tighter knit families and communities willing to help the people close to them, and making sure we remove all unnecessary barriers to new hires.

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  8. Some people simply refuse to understand the realities of economics. They want to live in a world of timeless stability, and can't be bothered with things like time, or entropy, or scarcity. These things are "evil", and they will eliminate them, by force if necessary.

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  9. The number one, and only real, reason free markets trump governmental intervention is that "free" word. Liberty means more to me than security, especially when that security is being brought, or more accurately NOT brought, to me by a coercive government.

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  10. "In my view, the problem in the United States is not one of wages plunging to starvation levels, if we remove minimum wage laws. Rather that many now who can not find jobs, starvation or otherwise, will at last be able to join the job market. In other words, the removal of minimum wage laws, removes evil."

    There is a problem. The Fed sees as it's mission to protect the price level for it's clients (not that they care about small businesses in my opinion). As a result they prevent the free market remedy from working.

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  11. "...I think the solution is something more like private unemployment insurance..."

    John, that is called 'saving for a rainy day.' Try it; it works really well. I know, because I found out the hard way, during my 13 months of unemployment back in '03-'04. No problem for me, my wife, two kids, and beagle: we just sold the McMansion, rented a tiny two bedroom condo, and scrimped until I found my next job. Sure, my wife had to return to the workforce for one year, and the kids let me know that I was a lousy stay at home Dad, but so be it.

    Saving: try it, you'll like it.

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  12. While I think that examples like the lobstermen have some value in explaining things, they also illustrate the exact problem with most economists.

    Carney sets up a situation (unemployed lobstermen), then dictates what their capabilities, aptitudes, and attitudes are, and declares victory.

    Why can't the lobstermen re-purpose their boats for other types of fishing? Why can't they start a charter fishing business? Why can't they sell their boats (assuming ownership) and use the capital to start another business? And on, and on, and on. He assumes they have no capacity for this or to learn new skills.

    This is the same hubris that all central planners have. We are all powerful and all knowing and will enact policies appropriately.

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  13. "the" Phantom CapitalistJanuary 6, 2012 at 4:36 PM

    If an NBA basketball player were to lose his job because people lost their interest in basketball is it evil that he no longer has a job. No. On the contrary, it is a miracle of the market that someone could get paid for putting a ball through a hoop in the first place.

    The market economy doesn't have to exist, claiming that unemployment is an evil is confusing why we have a division of labor in the first place. If someone whats to gather/hunt his own food, build his own house or knit his own clothing he/she/they are free to do so. By entering into the division of labor one is on the understanding this his skill(s) may or may not go out of demand. The fact that a human may have to adjust to the market is not evil. The fact that a human may have to learn a new skill is not evil. If this were the case than the whole evolutionary process of man is one borne from evil.

    A lot of this lingo reminds me of things that Keynesians/Socialists/Communists will use to argue for more government.

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  14. To Andrew Clark:
    Good point. Another thing that people tend to overlook in these simplified examples is that very rarely do things just end. Remember during the 2008 election there was a pro-Obama commercial about a guy working in a CATHODE RAY TUBE factory for 20 some years in Indiana. He complained because a French company bought his factory adn moved it overseas. He was made because he didn't have a job because Bush did something. No one seemed to question why he was working in a CRT factory, when every person in America was buying plasma tvs as the prices plummeted over the past couple years. For some reason he couldnt' figure out that that time was endind and thought he deserved a job.

    The concept that all of the sudden every lobster ceases to exist would seem impossible to me. The concept that every person in the world would end their demand for lobsters would seem to be statistically impossible. Can someone think of a way where some free market industry is wiped out immediately?

    There would be warning signs along the way. Demand would slow and margins would shrink. The harvests would trend lower over time. During this time, intelligent entreprenuers and businessmen would take note and realize that the time for lobsters might be up. They would use this transition period to build new skills, move to shrimp, charter fishing, etc just as you mentioned. That is why the Fed boom bust cycle is so dangerous. It manipulates the signals to the businessmen about demand, credit, and causes miscalculation. The smart businessmen who see the changes in the market would tweak or overhaul their businesses to take advantage of the new increase cash from consumers that was being used for lobsters.

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  15. If lobster is no longer in demand, it doesn’t make economic sense to continue supporting the unviable business using government hand-out. Unemployment is not a “social evil” but a signal for changes to be made. Re-adjustment of the free-market system can be disrupted if false impression that “politicians can possibly help the unemployed” is given. Everybody must realize that the market is cold-hearted (even more so the politicians, who are only kind-hearted to their crony and pretending to be angels to poor people) so that no one becomes dull to the risk of continuing unviable business and refuse to re-adjust when the needs arise. While the minimum wage law is not necessary, it is not the evil behind unemployment problem (unless it is set higher than the actual minimum amount for one to avoid starvation). The true evil is wastage of fund on big government which is not productive and sucks away the fund required for healthy operation of the free-market. Real wages will increase with greater production provided the product really has a market and not some useless or uncompetitive toys or non-essential financial gambling packages.

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  16. Why the example of lobstermen? Why not unemployed immigrants? And why should there be no transition period ('unemployment') between ceasing work and finding new work?

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  17. Ryan,

    In response to your second paragraph I would say that Austrians do not accept that a general depression or (general) downturn in the economy would arrive in a free market to cause such a problem. Sure, some people will be unemployed, just as the sun travels across the sky (it's unavoidable), but to have a general downturn requires intervention, whether it be nature itself or a monopoly power attempting to steer the economy.

    Sure, businessmen make mistakes, that is the heart of the market (weeding out the bad in favor of the good). But, in order to have what Mises described as a "cluster of errors" you need to have a single variable that could cause such a case. Obviously, if you're manipulating the calculating unit then you should expect certain consequences.

    It's like trying to run Leguna Seca with a speedometer and tachymeter that makes readings that have nothing to do with the engine. Without these gauges, you're essentially running on 'feel' alone. While that is great and all, I sure wouldn't want to be in the passenger seat.

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  18. Again, I see no evidence that the MMTers of whatever stripe have any familiarity with even basic Austrian School concepts. We all know that severe structural unemployment is caused by Keynesian policies themselves which distort the price structure and thus the investment and capital structure. The MMTers do not even know that these issues exist. They want to solve the problem that doesn’t exist with the “solution” that is the cause of the problem. Further, they have the most incredibly na├»ve view of government as omniscient and benevolent nanny and have no conception of “the knowledge problem” or public choice issues. If only we could get the money printing process away from the banksters and take it over ourselves, why everything would be right in the world and the law of scarcity would be abolished!

    It’s like debating a poodle.

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  19. "--they will finally get a job and learn basic jobs skills and certainly have more money in their pocket than they do now."

    I love this part -- since it draws attention to the importance Austrians devote to human capital/job skills -- what is evil is the government imposed ceiling via hurdles contributing to the self-reinforcing cycle of "poverty" and unemployment so prevalent in the world of yesterday -- today -- and tomorrow.

    It is the malinvenstment of human capital via government intervention that Carney should be focused on.

    -- Boettke writes:


    "It has been argued more recently (Bellante, 1983) that specialization and the division of labor have increasingly over time rendered labor skills nearly as specific as physical capital. Given the putty--clay nature of human capital, malinvestment is as possible in human resources as in physical capital. Thus the process of adjustment of the structure of production to a period of malinvestmest involves a realignment of both the physical and human capital dimensions of that structure. Analytically, structural unemployment cannot be separated from cyclical unemployment, as it is in the usual neoclassical treatment."


    Also I would have to add the below statement is absurd and to not approach it as such is to lose the argument before it has begun:

    "They have skills for which there is no market. They must now take jobs that demand no skills, perhaps leaving their homes in search of unskilled labor. "

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  20. I have a problem with Carney separating out "economy" and "market." How does that work, I mean. The "market" is not some kind of ghost standing outside the economy...

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  21. I don't think the thing keeping black males unemployed is a lack of low paying jobs available. In many cities there are all kinds of jobs available at fast food and other minimum wage jobs. Many black males do not want to work them.

    What you are saying is that the reason black males will not work for 7 dollars an hour is because there are not any 5 dollar an hour jobs available and that is ridiculous.

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  22. Anon@4:15 PM,

    Robert did mention welfare. Take that away and there would be plenty of people wanting those jobs. Also I think that sometimes the black unemployment rate is misleading, as many black men are part of the informal economy, and are thus working in a sense.

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  23. Anon 4:15 You are confusing several concepts here. The reason these individuals, regardless of their skin tone are not working for $7 dollars/hour, a wage rate vastly higher than the market clearing rate resulting from min. wage laws, is that the government is providing them with plenty of incentives to do nothing whatsoever, except, perhaps, to have more children: unemployment benefits, medicare, etc.

    Were these perverse incentives (regardless of how well meaning their intention was) removed, these individuals would be more than happy to work for $5/hour and certainly for the higher min wage mandated rate of $7/hour (these dollar amounts are just for example). These type of programs, designed to cure the 'social evils' breed the most evil of all human sentiments: self-entitlement. Why are these young men not working? Because some crank assured them that it was their RIGHT to have a higher paying job. A job is not a right.

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