Unemployment explanations

post by Stuart_Armstrong · 2014-11-07T17:12:06.572Z · score: 28 (31 votes) · LW · GW · Legacy · 113 comments

Contents

  Classical explanations: not a problem
  Classical explanations: market interference
  Frictions and "Irrationalities"
  Information and agency
  Macro
  My evaluation
  Not explanations
None
113 comments

When I knew nothing of economics, unemployment wasn't mysterious. People wanted a job, and couldn't get one - well, people often want stuff they can't get. Nothing strange there, just one of those things.

Then I learnt some simple economics, and it became more mysterious. The employment market is a market, with the salary being the price. Why doesn't this market clear? Why doesn't the price (salary) simply adjust, and then everyone gets a job? It seemed profoundly mysterious that this didn't happen.

I've been gradually introducing myself to more economics (mostly indirectly) and I've encountered a lot of explanations for this perpetual market failure. Thus the mystery of unemployment is, if not resolved, at least somewhat explained. Since I would really have enjoyed reading a collection of unemployment explanations when I was initially puzzled (almost any explanation of unemployment you read in the press is worthless) I thought I'd do this for others. So here is my (entirely personal and idiosyncratic) summary of the main explanations I've encountered.

 

Classical explanations: not a problem

The "revealed preferences" idea holds that we can't establish what people want from what they say, but only from observing their actions and their choices. So if people are not getting jobs, maybe they don't really want them? Or maybe they don't want them, given government unemployment insurance?

I should note that whatever you think of this explanation, it argues that unemployment is not an economic problem. It views the unemployed as happily and rationally choosing not to work, which thus suits their preferences better and thus is of higher economic value (neglecting, of course, the cost of providing unemployment insurance).

 

Classical explanations: market interference

If a market fails to clear, the first step is to look at outside interventions that may be preventing it from doing so. Trade unions and governments are typical candidates for this. Trade unions engage in collective bargaining, requiring that employers pay their workers a certain minimum level (in terms of salary, safety, or working conditions). This raises the price of employees above the market clearing level, and thus causes a shortage of jobs.

Similarly, governments can set minimum wages, regulate who is allowed to work in certain professions, and tax employers or employees (the difference is not relevant economically) for the job. They can impose other restrictions, such as making it harder to fire employees, or creating red tape that must be dealt with (thus raising the cost of employing anyone).

 

Frictions and "Irrationalities"

The market equilibrium is an attractor state the market is supposed to move towards. Frictions are things that oppose this movement or slow it down. "Irrationalities" are ways in which humans differ from the perfectly informed selfish expected utility maximisers of classical economics. They may not be irrationalities in the standard sense, just deviations from the model (note that unlike the stereotype, economists are often very aware of the limitations of their models).

There are costs involved in changing most jobs. The employee may need to change their social circles, their habits, their schedules, and may need to relocate to another area. The employer may need to arrange training for a new worker, integrate them into a team, and so on. Changing a job is often a very stressful event, implying that employees, at least, feel these costs are significant. In consequence, people don't relocate for a slight improvement of conditions, and employers don't fire people to replace them with slightly cheaper workers. The market is thus less likely to adjust.

Another friction is the stickiness of nominal wages. People seem very unwilling to accept a nominal pay cut, taking this as an attack on their status. This prevents companies from rapidly adjusting to new economic conditions (in both directions: they are less likely to raise wages, if they can't claw that raise back later) with their current employees. Some jobs have important non-monetary aspects to them (eg working for government and charities because one wants to make a difference, working for a market leader, working for a company with a certain corporate culture, etc...); these aspects (that form part of the whole compensation package) cannot be rapidly adjusted up or down. Managers and workers often develop relationships with each other, reducing the likelihood that bosses would rapidly fire workers or cut wages if economic conditions demanded it.

Human behaviour and biases can provide a general explanation why agents follow behaviours that make little economic sense (issues of status, of habit, prejudices, etc...). Into this category go all the "relative status" explanations: it's not important to have a good standard of living, but a comparatively good standard of living.

Another interesting friction is changes in the economy produced by new technologies, new innovations, new companies, and people entering or leaving certain industries. The economic landscape is always changing, and all economic agents have difficulty adjusting rapidly (because of the frictions above, and because of lack of information about the new setup, see next section). This explanation is particularly interesting, because they provide a possible reasons that frictions wouldn't die out, but could continue for a long time. But if the equilibrium state is constantly changing, then frictions can maintain themselves indefinitely, perpetually slowing down any move toward labour market equilibrium.

 

Information and agency

Information economics is a fascinating field, full of weird insights, including several that can contribute to unemployment. At the most basic level, employees don't know about the jobs on offer (they don't know all job descriptions, and even those job descriptions only give a very partial impression of what the job entails) and employers similarly don't know about all potential employees. There is a cost to finding this information.

Information markets are unlike any other market, though. Even the smallest of information errors can create new equilibriums - stable equilibriums where the market doesn't clear. What this means is that, lack of information can explain stable rates of involuntary unemployment even in the absence of any other frictions.

The principal agent problem is another huge factor here. If the "principal" requires an "agent" to do work for them, they cannot be sure the agent will do so in the way they expect (this problem can be seen as an information issue: the principal doesn't know something - the agent's performance - and the agent cannot fully demonstrate it to them). Hiring managers may not fully trust their candidates, and they might not be fully trusted by their bosses, who are not fully trusted by the shareholders, and so on.

This means that worker X may be willing to do a job for salary S (including implicit remuneration), and firm Z may be willing to offer that, but neither can trust the other to uphold the deal. Obviously this effect is stronger when the output can't be measured formally, or when implicit aspects of the job (working conditions, office atmosphere) are important to the employee.

This is one of the reasons that companies often pay "efficiency wages", ie pay more than the market rate for jobs where output can't be measure formally. Employees who value being part of the company, have good relations with their bosses, and fear losing their good position, will work harder to demonstrate their competence, and bring more value to their employer (intuitive explanation for this: the marginal worker, paid at the market rate, only prefers having a job to quitting it by an infinitesimal amount, and will quite if anything goes slightly worse - is this the kind of employee you'd like to have on staff?). Thus companies that pay efficiency wages often profit from doing so.

But paying above the market rate, even for good reasons, still means that the market won't clear. Note that efficiency wages alone are also enough to explain involuntary unemployment.

 

Macro

Macroeconomics (by which I mean mainly the Keynesian/Monetarist schools) is built on the seeming trivial observation that the salaries of workers are the means by which they buy products, and that the sale of these products are the income of the firms that employ people. Therefore, if the job market doesn't "clear" it's not as simple as just waiting for salaries (the price of that market) to adjust. If salaries fall, this feeds into less cash for consumers, which generally implies less consumption, which feeds into less revenue for firms, lowering their demand for workers, etc...

There are some theorems that imply that the job market should still reach equilibrium... if there are no frictions. In the presence of frictions, there is no reason to assume that the job market would clear: persistent involuntary unemployment can be a permanent feature of the economy. In classical economics, wages cannot rise in a sector while a single person remains involuntarily unemployed (because they could undercut someone and get their job or a fraction of their job); in practice, wages do start rising long before involuntary unemployment goes to zero (a "strong job market for programmers" does not require every aspiring programmer to have a job). This raises the cost of hiring someone, preventing unemployment from disappearing.

Furthermore, the economy need not settle down to a stable equilibrium either: it can go through cycles of expansion and contraction, thus explaining the business cycle. This adds yet another explanation for unemployment: the economy being in recession.

The other claims of macro are that there are several different states that the economy could be in, for the same given inputs, and that fiscal and monetary policy (government taxing/spending and interest rate changes) can move it from one state to another, affecting the unemployment rate. The main practical differences between Keynesian and Monetarists revolve around the role of government and what to do when interest rates are at zero, but that is not relevant for this analysis.

 

My evaluation

This is where I get to share my own unvarnished and unwashed opinions as to the validity of these arguments. Take this section with many caveats and doubts. Then add a few more.

First of all, classical explanations. Most of them seem off, for the same two reasons: being unemployed is very painful for most of the population, and most people care more about their relative position (are they as well off as their peers?) than about their absolute position. This means that if some intervention gradually reduces everyone's salaries by 50%, then most people will still be willing to work. Thus there seems to be little explanatory power in classical explanations that assume that people won't work because the salary is too low. This category also includes employment taxes, since, whoever nominally pays them, the actual burden falls on those with the least flexibility, ie the employees (you can start talking about elasticity here, if you want).

But firms are not individuals, and function very differently. Thus classical explanations that explain why firms won't hire people (rather than why people won't be hired) seem much stronger. This includes minimum wages and labour market rigidities (eg firms can't easily fire people once hired). In practice, minimum wages seem to have little impact (there are a bunch of contradictory studies here), but labour market rigidities seem very important. Cross country comparisons ("Southern Europe" unemployment rates versus "Northern Europe"/Anglo Saxon ones) seem to bear this out.

I feel that labour market rigidities along with the various frictions and information issues (to a greater or lesser extent) seem a good explanation for the background rate of unemployment of a country (averaged over the business cycle).

Conversely, the Keynesian/Monetarist model seem good at explaining the business cycle. Some of the classical theory is also of value in explaining recessions caused by external shocks (eg the oil shocks of the 1970s).

 

Not explanations

Notice what is absent from these explanations: general education level, free trade (or its absence), infrastructure, technology, company X opening (or closing) a factory/research centre/office in location Y. It seems the stories that are always reported in the media may affect who gets a job (and at what wage), and may affect the overall growth rate, but they don't directly affect the unemployment rate at all (indirect effects may exist, but they have to be analysed carefully and are often hard to predict).

So. Now you (kinda) know.

113 comments

Comments sorted by top scores.

comment by RomeoStevens · 2014-11-08T01:14:41.315Z · score: 17 (17 votes) · LW · GW

I think that simple location is a massive friction and not fully accounted for. Look at how much commuting saps happiness. Look at how unwilling people are to relocate (above and beyond the costs of doing so). Look at how little companies recruit outside their immediate area.

comment by JoachimSchipper · 2014-11-08T14:14:26.535Z · score: 9 (11 votes) · LW · GW

And, of course, encouraging homeownership makes this worse. Good thing that most of the Western world hasn't made that an explicit policy goal for the past decade...

comment by Strange7 · 2014-11-28T00:45:50.384Z · score: 1 (1 votes) · LW · GW

Homeownership makes employees less willing to relocate, but also more tolerant of short-term decreases in the demand for their skills, since they can postpone maintenance on a house (or perform it inefficiently themselves with the surplus time) more safely than they can miss rent payments to a landlord.

comment by CellBioGuy · 2014-11-08T16:08:23.645Z · score: 0 (4 votes) · LW · GW

Try three.

comment by ESRogs · 2014-11-08T16:27:18.450Z · score: 3 (3 votes) · LW · GW

Is this a reference to this saying?

comment by TheAncientGeek · 2014-11-08T17:27:28.492Z · score: 4 (4 votes) · LW · GW

Skills are another friction...indeed several frictions. Academia often lags industry requirements, employers don't like investing in training, etc,

comment by [deleted] · 2015-01-25T02:26:54.364Z · score: 2 (2 votes) · LW · GW

This is not the same as unemployment, technically. "I want to get a job, but the commute sucks" is not really any different from "I want to get a job, but not getting to play video games in my pajamas all day sucks." The latter individual is nonemployed, and so is the former, I suppose.

Economic frictions are not simply anything that makes getting a job difficult, but things that interfere with the equilibrating function of the price mechanism.

comment by [deleted] · 2014-11-08T17:28:34.515Z · score: 0 (2 votes) · LW · GW

Look at how little companies recruit outside their immediate area.

Which then pushes up the cost of living in their immediate area, making the salaries they do pay not go as far, forcing up their labor costs to attract good employees...

(LOOKING AT YOU, BAY AREA TECHNOLOGY SECTOR...)

comment by VAuroch · 2014-11-09T03:53:42.548Z · score: 3 (3 votes) · LW · GW

Unless I'm parsing it wrong, recruiting from outside your local area would drive the cost of living up, not down. For the present, most jobs still require physical presence from the employee, so recruiting from outside the local area would create a steady population of people who need to move to the local area and are willing to pay a modest premium to do so quickly.

comment by [deleted] · 2014-11-09T07:45:15.813Z · score: 0 (0 votes) · LW · GW

Unless I'm parsing it wrong, recruiting from outside your local area would drive the cost of living up, not down.

Yes, that's exactly what I was saying.

comment by VAuroch · 2014-11-11T02:19:24.698Z · score: 2 (2 votes) · LW · GW

Your comment above is saying the opposite thing.

Currently, most companies don't recruit people from distant places. They hire from the local population, which means that for the most part, hiring moves people around a local area and doesn't create price pressure unless the local industries are growing significantly or salaries are increasing significantly.

If companies started hiring globally, there would be increased pressure on prices as the locations of successful companies had a steady stream of people moving in.

comment by V_V · 2014-11-08T17:18:23.415Z · score: 13 (13 votes) · LW · GW

I should note that whatever you think of this explanation, it argues that unemployment is not an economic problem. It views the unemployed as happily and rationally choosing not to work, which thus suits their preferences better and thus is of higher economic value (neglecting, of course, the cost of providing unemployment insurance).

This seems to be a non sequitur:
If a specific unemployed person in a given state of the job market maximizes their utility by not taking any job offer, it doesn't imply that they are happy of the current state of the job market. They may be unwilling to work at the conditions that are currently offered, but they may be willing to work at different conditions.

The most obvious and extreme scenario is when you are starving and all the jobs available to you are physically strenuous and yet offer starvation wages: you'd probably better off conserving energy and trying something else, including begging or stealing (if you are caught, you will go to prison where the state will feed you).

More generally, in the standard one-shot prisoner's dilemma, you are probably going to defect, since it is the choice that maximizes your utility assuming that the other player also tries to maximize their utility. This doesn't imply that you are happy to play the standard one-shot prisoner's dilemma.

This means that if some intervention gradually reduces everyone's salaries by 50%, then most people will still be willing to work.

If all employers could pre-commit to do reduce everyone's salaries by 50% and stick to their decision, and it was legally possible for them to do so, and they could somehow survive the massive strike that would ensue, then employees would probably have to swallow it. But even if employers could legally unilaterally change salaries, they compete with each other to get workers, so they can't realistically do that.

It seems that you forgot to mention another obvious possible explanation:
Some people may just be unemployable.

Some people may be unemployable in general because they are mentally ill or physically ill (though they are still accounted for as "employable" in the statistics because of underdiagnosis).
The extreme example would occur if starting from tomorrow we counted chimps as people. All of them would be unemployed and permanently so because they would be always unfit for work.

Some other people may be employable under different economic/technological conditions, but not under the current ones. The extreme example would occur if we had robots with a IQ-160-human-level intelligence that could be rented for 1/100th of the current minimum wage. Who would be going to hire humans in this scenario?

comment by Stuart_Armstrong · 2014-11-09T15:42:34.752Z · score: 1 (1 votes) · LW · GW

They may be unwilling to work at the conditions that are currently offered, but they may be willing to work at different conditions.

That likely brings us to improvements that are non-Pareto, hence rarely addressed in classical economics.

But even if employers could legally unilaterally change salaries

I was more thinking of government interventions like employment taxations.

comment by V_V · 2014-11-09T17:06:52.409Z · score: 1 (1 votes) · LW · GW

That likely brings us to improvements that are non-Pareto, hence rarely addressed in classical economics.

Possibly, but it may also happen that the current issues are caused by coordination failures, which if solved could lead to Pareto improvements.

But even if there are no available Pareto improvements, it doesn't imply that this is the best of all possible worlds.

comment by [deleted] · 2015-01-25T02:31:12.531Z · score: 0 (0 votes) · LW · GW

Pareto improvements are not really a classical concept. I think Pareto used them, but it was the neoclassical Pigou or someone around that time who made them widespread.

comment by [deleted] · 2015-01-25T02:30:07.378Z · score: 0 (0 votes) · LW · GW

Someone can rationally choose to not have a job as the utility-maximizing alternative in some given situation while wishing the job market were otherwise. What is efficient, and what is ideal, are not the same thing.

comment by mwengler · 2014-11-24T15:12:35.945Z · score: 0 (0 votes) · LW · GW

The extreme example would occur if we had robots with a IQ-160-human-level intelligence that could be rented for 1/100th of the current minimum wage. Who would be going to hire humans in this scenario?

My first thought was "sex workers," thinking many customers might prefer a dull human to a smart robot. But as saturday night live pointed out on a recent show, and I paraphrase, 58% of people interviewed said they would have sex with a sex robot, and 42% were lying.

comment by selylindi · 2014-11-11T03:06:50.645Z · score: 10 (10 votes) · LW · GW

Another friction is the stickiness of nominal wages. People seem very unwilling to accept a nominal pay cut, taking this as an attack on their status.

Salary negotiation is a complicated signalling process, indeed. I'm currently an unemployed bioengineer and have been far longer than I would have liked, and consequently I would be willing and eager to offer my services to an employer at a cut rate so that I could prove my worth to them, and then later request substantial raises. But this is impossible, because salary negotiations only occur after the company has decided that I am their favorite candidate out of however many hundreds apply.

Worse, if I take the first move and openly (e.g. on my resume or cover letter) inform the company of my willingness to work on the cheap, they would assume that I am signalling being a very low-quality engineer, which is very far from the case.

Unemployment does very much seem to be an information trap.

comment by 27chaos · 2014-11-24T18:11:01.315Z · score: 1 (1 votes) · LW · GW

Worse, if I take the first move and openly (e.g. on my resume or cover letter) inform the company of my willingness to work on the cheap, they would assume that I am signalling being a very low-quality engineer, which is very far from the case.

Are you very confident that this is the inevitable signal? I'd imagine that if you gave a well worded explanation of your circumstances this would not be so likely. Consider that your resume is not the sole means of communication available to you, this is not necessarily a one shot exchange of information. You could, for example, ask within your resume for them to use the interview to verify your claims of competency despite your willingness to accept a low salary. Or, you could try to speak to someone in person.

If I am naively other-optimizing, please let me know. Apologies if so. I hope that's not the case, and that you find this potentially helpful.

comment by selylindi · 2014-11-25T02:26:44.675Z · score: 2 (2 votes) · LW · GW

The specific example you gave doesn't sound promising, but you're entirely correct in the broader sense that my original post was unimaginative regarding possible solutions.

EDIT: It was worth an empirical try, so I tried your recommendation on a subset of applications. Zero responses from that group of companies.

comment by Izeinwinter · 2014-11-24T18:44:48.367Z · score: 0 (0 votes) · LW · GW

Sely is correct. Doing that is a guaranteed way for the application to end up in the circular file. You should also note that places that offer internships, which is this idea more formalized, universally exploit the interns for free labor and then don't hire them. Literally, given identical qualifications having done an unpaid internship gives you zero help in getting actually hired. There are statistics on this!

The only way to force the world to give you a job is to create it. IE: Start your own buisness. Which may also lead to instead bankrupcy, but at least, not unemployed.

comment by [deleted] · 2014-11-08T17:17:15.851Z · score: 10 (10 votes) · LW · GW

Another friction is the stickiness of nominal wages. People seem very unwilling to accept a nominal pay cut, taking this as an attack on their status.

There's actually a major reason for the stickiness of nominal wages you've failed to account for: debt overhang. Any and all debts are calculated in nominal currency, not real currency, so if the labor market deflates (across-the-board salary drops), the debts of everyone who works for a living grow correspondingly more difficult to pay.

This explanation can be generalized: the higher the average (mean or median) level of debt among any given population, the more difficulty markets among that population will have in clearing, because market adjustments don't change the price-levels on time (hence debt: borrowing is buying time) that has already been bought and sold, forcing everyone to try and obtain the old prices (corresponding to prices when they took their loans) whenever they can.

This is why liberal bankruptcy statutes are one of the most important parts of a functioning market economy: future default risk is supposed to be a risk born by all prospective future lenders, and factored into the interest rate, rather than allowing newly-unpayable debts to drag down price movements throughout the entire economy.

(It's also why so many instances of bank bailouts lately have created "zombie" economies in which growth remains perpetually low: the misvalued debts were never cleared, but deflationary pressures have set in, so the real economies are being drained of larger amounts of real productivity than the debts originally corresponded to.)

Thus there seems to be little explanatory power in classical explanations that assume that people won't work because the salary is too low.

Except, of course, when the effective salary, after cost-of-living, relocation costs, training/educational-debt repayments, etc, is negative, in which case it is trivially irrational to take such a job.

(This actually explains more of the "skills gaps" than employers usually want to admit, since that would keep them from purchasing gold for the price of bronze.)

comment by [deleted] · 2014-11-09T20:27:56.327Z · score: 2 (2 votes) · LW · GW

I find this comment very interesting, but I'm generally confused by economics and have a few points of confusion here.

It's also why so many instances of bank bailouts lately have created "zombie" economies in which growth remains perpetually low: the misvalued debts were never cleared, but deflationary pressures have set in, so the real economies are being drained of larger amounts of real productivity than the debts originally corresponded to.

To check my understanding, is the "underwater mortgage" pattern a concrete example of this?

This explanation can be generalized: the higher the average (mean or median) level of debt among any given population, the more difficulty markets among that population will have in clearing, because market adjustments don't change the price-levels on time (hence debt: borrowing is buying time) that has already been bought and sold, forcing everyone to try and obtain the old prices (corresponding to prices when they took their loans) whenever they can.

I understand that deflation is bad for debtors, but I'm confused about the concrete ways in which this means the rational behavior of debtors (in contrast to psychological explanations like morale) could be the cause of downward nominal wage rigidity. Is the idea that bankruptcy is an abrupt flat line on the utility-money curve, and so an employee can credibly pre-commit to quitting in response to a nominal pay cut (of certain magnitude), because the pay cut would lead to the same outcome (bankruptcy) as getting fired? And then "no nominal wage cut" emerges as a sort of Schelling point (because the exact degree of nominal wage cut that would lead to bankruptcy is unknown to the employer)?

comment by 27chaos · 2014-11-24T22:33:52.480Z · score: 0 (0 votes) · LW · GW

This explanation can be generalized: the higher the average (mean or median) level of debt among any given population, the more difficulty markets among that population will have in clearing, because market adjustments don't change the price-levels on time (hence debt: borrowing is buying time) that has already been bought and sold, forcing everyone to try and obtain the old prices (corresponding to prices when they took their loans) whenever they can.

Does this also imply that government debt is less harmful to the economy than private debt, all else being equal?

comment by [deleted] · 2014-11-25T08:44:53.479Z · score: 2 (2 votes) · LW · GW

While I have not rigorously researched that issue, I would call it a plausible view: the state is a single market actor, so outside markets driven entirely by state demand (which, admittedly, are myriad), the state's problems don't affect general price-levels.

comment by cousin_it · 2014-11-09T11:08:14.120Z · score: 7 (7 votes) · LW · GW

Is it really true that most markets clear, and the labor market is unusual? It seems to me that a lot of non-labor stuff also goes unsold. If I try to sell something, like my old phone, then I will probably observe that it goes unsold for at least some time. Is that also a mystery for economics?

Macroeconomics (by which I mean mainly the Keynesian/Monetarist schools) is built on the seeming trivial observation that the salaries of workers are the means by which they buy products, and that the sale of these products are the income of the firms that employ people. Therefore, if the job market doesn't "clear" it's not as simple as just waiting for salaries (the price of that market) to adjust. If salaries fall, this feeds into less cash for consumers, which generally implies less consumption, which feeds into less revenue for firms, lowering their demand for workers, etc...

How is this different between the labor market and any other market? If I try and fail to sell my old phone, that also affects my ability to buy stuff.

comment by mwengler · 2014-11-24T15:08:39.324Z · score: 1 (1 votes) · LW · GW

Is it really true that most markets clear, and the labor market is unusual? It seems to me that a lot of non-labor stuff also goes unsold.

Good point! Even in the used car market, there are cars which are old enough and/or broken enough that they are finally disposed of. One could say these are still "sold," but the analogy in labor markets would be people selling their organs, or selling their bodies to be used as food.

So plenty of markets do not clear. Maybe even all of them. Supermarkets and restaurants throw out food they didn't sell. The company I work at pays people to take away old electronic equipment from our labs rather than selling it to third world countries or some such.

comment by Lumifer · 2014-11-24T17:10:59.725Z · score: 3 (3 votes) · LW · GW

So plenty of markets do not clear. Maybe even all of them.

You misunderstand the term.

"The market clears" means that there exists a price (a "market-clearing price") at which the supply and the demand are exactly balanced. It does NOT mean that every seller sells everything and every buyer gets what he wants.

comment by mwengler · 2014-11-25T09:45:22.040Z · score: 2 (2 votes) · LW · GW

">The market clears" means that there exists a price (a "market-clearing price") at which the supply and the demand are exactly balanced.

Well, it means that the market clearing price is actually allowed to be the prevailing price in the market. A market with either an enforced minimum price which is higher than the market clearing price will have excess supply. Unemployment in the presence of a minimum wage, for example. A market with an enforced maximum price which is lower than the market clearing price will have unsatisfied demand. Rationing of price-fixed commodities like meat, sugar, and fuel during WWII are examples of this. The fact that there existed in these cases a theoretical, but illegal price that would have matched supply to demand does not mean the market clears.

It does NOT mean that every seller sells everything and every buyer gets what he wants.

But it does mean that everything offered at a price that is less than the market clearing price is purchased. In the case of unemployment you have people who would be willing to work for less than some employed people, but those people are not hired while the employed people continue being paid more than the unemployed people would accept.

A minimum wage law forces a market to not clear, unless the minimum wage is set below the market clearing wage, in which case the law has no effect and might as well not exist.

Most people who support the minimum wage seem to think that you can force a market to pay "everybody" an above market clearing price. In fact, all you can do is force people to pay the employed a minimum wage, you can't force them to pay the unemployed who would like to work at the minimum wage or less, anything at all. Those people make zero.

comment by Lumifer · 2014-11-25T15:35:35.775Z · score: 2 (2 votes) · LW · GW

it means that the market clearing price is actually allowed to be the prevailing price in the market

Yes, I agree. For the market to clear it must actually be able to trade at that price.

A minimum wage law forces a market to not clear

Yes -- as a more general statement, any binding price constraint causes the market to not clear.

comment by ChristianKl · 2014-11-25T14:30:51.319Z · score: 2 (2 votes) · LW · GW

Most people who support the minimum wage seem to think that you can force a market to pay "everybody" an above market clearing price.

I think that's a strawman. With or without a minimum wage the market doesn't employ everybody.

There's not good evidence for the minimum wages reducing the amount of jobs. Reality is complex.

comment by mwengler · 2014-11-25T14:56:08.689Z · score: 1 (3 votes) · LW · GW

There's not good evidence for the minimum wages reducing the amount of jobs. Reality is complex.

There is not good evidence that a minimum wage does NOT reduce the amount of jobs.

Meanwhile, unpaid internships and graduate assistantships are being attacked because they do not meet minimum wage laws. Is there good evidence that a graduate student is better off if she is not offered a stipend to help teach, or that a would-be television worker is better off if they cannot work for a year on a television show as an aid to making themselves employable? Is there evidence that the rather general mathematics of optimum economic deployment of resources when market mechanisms are used does NOT apply to the bottom end of the labor market?

If one were to look for it, might there be evidence that if you think society owes a person a higher income than can be gathered by working full time at the minimum wage, that it makes sense to put the burden or cost of that conviction entirely on the employer of that person? That is, wouldn't be better off sharing the cost of our social justice convictions across the entire tax base with something like a negative income tax?

I personally am a fan of passing laws only when their is good evidence that they do more good than harm. A lack of good evidence that they do harm is NOT a good reason to pass a law.

What do you think the effect of passing a $25 or $50/hr minimum wage? I think it would destroy the economy. And in the absence of good evidence that there is some kind of magic non-linearity down at the $10/hr and lower level, I suspect the only reason that there is not "good" evidence that a low minimum wage does harm is because the "signal" has been turned down so it is in the "noise" by choosing low numbers that allow you to miss the effects you are looking for.

comment by ChristianKl · 2014-11-25T16:14:56.890Z · score: 0 (0 votes) · LW · GW

Is there good evidence that a graduate student is better off if she is not offered a stipend to help teach, or that a would-be television worker is better off if they cannot work for a year on a television show as an aid to making themselves employable?

The problem is that there are too many people who want to be television workers. Having a market that pushes some of those people out of that industry and into something more productive is useful.

The fact that universities who get huge tuition fees use graduate students who haven't learned anything about teaching to teach is appalling. If you force a university to pay the people who teach more money than they will have higher standards and pick people who can teach better. The university doesn't suddenly stop teaching.

Is there evidence that the rather general mathematics of optimum economic deployment of resources when market mechanisms are used does NOT apply to the bottom end of the labor market?

If the mathematics would really work you could calculate the size of the effect and see whether or not the effect exist in reality. In reality things are complex enough that you can't predict them with the models. That proves the math doesn't work out. Cognitive Science also frequently shows that humans aren't simple utility optimizers.

That is, wouldn't be better off sharing the cost of our social justice convictions across the entire tax base with something like a negative income tax?

Today that's commonly called basic income. I'm in favor of it but the underlying politics are complex.

I suspect the only reason that there is not "good" evidence that a low minimum wage does harm is because the "signal" has been turned down so it is in the "noise" by choosing low numbers that allow you to miss the effects you are looking for.

If the signal has turned down and the effect is really small, then the effect maybe isn't that important.

comment by mwengler · 2014-11-26T09:25:42.257Z · score: 2 (2 votes) · LW · GW

The problem is that there are too many people who want to be television workers. Having a market that pushes some of those people out of that industry and into something more productive is useful.

Do you really think you know what is more productive and what is less better than the market? If only the centrally planned economies had had access to your expertise before they collapsed, we might now be living in a worker's paradise!

The fact that universities who get huge tuition fees use graduate students who haven't learned anything about teaching to teach is appalling. If you force a university to pay the people who teach more money than they will have higher standards and pick people who can teach better. The university doesn't suddenly stop teaching.

You're not from around here, are you. I was a professor, a higher priced teacher at a university. I had NO training to teach and was not hired based on my ability to teach, but rather was hired entirely on the basis of the research I had done. And this is typical. The highest paid teachers are the most famous, and they are notoriously NOT available for a lot of teaching. The higher paid the professor the less time they spend teaching, and none of them got that high pay based on their ability to teach in the first place.

If the signal has turned down and the effect is really small, then the effect maybe isn't that important.

In which case it makes absolutely no sense to pass a law about it.

comment by CCC · 2014-11-26T09:54:39.588Z · score: 0 (2 votes) · LW · GW

Do you really think you know what is more productive and what is less better than the market?

The market is not what decides which skillsets are over-supplied and which are under-supplied. The market merely reacts to this over- or under-supply by adjusting salaries.

What decides which skillsets are over- or under-supplied is a whole lot of students, fresh out of high school, deciding which career(s) to pursue. If more of them decide to pursue a career in television than there is demand for careers in television, then the market-clearing price for careers in television will drop; possibly even to below a living wage. (The market does not care about whether people live or not). On the other hand, if virtually nobody wants to pursue a career in (say) medicine, then those few who do will be able to earn vast amounts of money... but they will not be able to provide medical care to everyone, which would be a bad thing.

Personally, I find it easy to believe that ChristianKi is better at predicting which careers are productive than an average student just out of high school.

comment by ChristianKl · 2014-11-26T13:12:03.162Z · score: -1 (1 votes) · LW · GW

Do you really think you know what is more productive and what is less better than the market? If only the centrally planned economies had had access to your expertise before they collapsed, we might now be living in a worker's paradise!

This discussion isn't about central regulation of television workers but on setting parameters within with market forces can act. I don't advocate solving the issue through quota but through using the market.

In which case it makes absolutely no sense to pass a law about it.

Unless you don't pass the law to effect the number of job but you want that the people at the bottom that have jobs have higher payed jobs.

comment by [deleted] · 2015-01-25T02:37:56.267Z · score: 0 (0 votes) · LW · GW

In the case of unemployment you have people who would be willing to work for less than some employed people, but those people are not hired while the employed people continue being paid more than the unemployed people would accept.

To do the same work?

comment by [deleted] · 2015-01-25T02:35:07.292Z · score: 0 (0 votes) · LW · GW

Yes, this. Any number of unsold product does not indicate a failure for the market to clear per se. It just means that someone guessed wrong as to what that price is.

comment by cousin_it · 2014-11-26T16:02:01.680Z · score: 0 (0 votes) · LW · GW

Okay, I'm confused. Why does Stuart say in the original post that a clearing labor market would give everyone a job?

comment by Lumifer · 2014-11-26T16:14:06.826Z · score: 0 (0 votes) · LW · GW

You have to ask him. Note that a single labor market is an abstraction -- in reality there are lots and lots of little labor markets. If you treat each job (and each job-seeker) as its own labor market, then all these nanomarkets clearing would represent everyone getting a job -- but that's a rather silly way to look at things.

comment by [deleted] · 2015-01-25T02:36:47.767Z · score: 0 (0 votes) · LW · GW

Or the market would fail to exist when someone is unwilling to buy or sell at the price necessary for the exchange to go through. It's not a market without a buyer and a seller, so all markets would clear here because the markets that wouldn't would never be realized.

comment by cousin_it · 2014-11-26T22:11:12.014Z · score: 0 (0 votes) · LW · GW

Yeah, that seems silly. That's like treating every object on sale as its own little market.

comment by EHeller · 2014-11-24T18:45:04.336Z · score: 0 (0 votes) · LW · GW

I think "markets clear" implies the market finds the market-clearing price, in which case everything gets sold (i.e. no surplus inventories over the long run).

comment by Lumifer · 2014-11-24T19:06:42.175Z · score: 1 (1 votes) · LW · GW

The market does indeed find the market-clearing price, that's what markets do, but I don't see how that leads to "everything gets sold", especially given that that the market-clearing price changes over time.

comment by V_V · 2014-11-24T19:26:30.437Z · score: 0 (0 votes) · LW · GW

If the supply and demands are perfectly balanced, how is it possible that there are some goods not being sold?

comment by Lumifer · 2014-11-24T19:41:11.701Z · score: 4 (4 votes) · LW · GW

Because some owners of the goods are not interested in selling at the current market-clearing price and because some potential buyers are not interested in buying at the current market-clearing price.

Supply and demand are not fixed scalars, they are functions of the price.

comment by 27chaos · 2014-11-24T22:36:40.206Z · score: 0 (0 votes) · LW · GW

What does it mean for supply and demand to be balanced, then? How do we tell the difference between a market where they are balanced and a market where they aren't balanced?

comment by Lumifer · 2014-11-25T00:15:02.952Z · score: 2 (2 votes) · LW · GW

What does it mean for supply and demand to be balanced, then?

Just solve the equation: supply(price) = demand(price)

How do we tell the difference between a market where they are balanced and a market where they aren't balanced?

In the market where they are not balanced there is either excess supply or unsatisfied demand at the prevailing price. The usual reason is some constraints on prices.

comment by EHeller · 2014-11-25T01:16:20.374Z · score: 1 (1 votes) · LW · GW

So empirically, what is the difference between a market that hasn't cleared vs. one that has, in your view? What would that look like in terms of inventories?

The usual definition of market clearing implies that we don't end up with surplus inventories building up over time (because everything is sold), etc.

comment by Lumifer · 2014-11-25T02:01:41.281Z · score: 1 (1 votes) · LW · GW

So empirically, what is the difference between a market that hasn't cleared vs. one that has, in your view?

Well, as I said, there is either excess supply or unsatisfied demand -- that's pretty empirical.

Take the old Soviet-style planned economies -- they had lots of markets that didn't clear. In the US, for example, there are certain things in very limited supply with more or less fixed prices -- e.g. licenses to go photograph bears fishing for salmon on Katmai peninsula -- they are allocated on the basis of lotteries. These markets don't clear. In another example, financial markets sometimes have limits on price movement during one day -- once that limit is reached, the price can go no further. In such cases these markets don't clear either.

implies that we don't end up with surplus inventories

We don't end up with surplus inventories (mostly) because the situation is dynamic: both the prices and the people adjust over time.

comment by EHeller · 2014-11-25T02:25:48.785Z · score: 1 (1 votes) · LW · GW

Well, as I said, there is either excess supply or unsatisfied demand -- that's pretty empirical.

But you shifted it to "excess supply or unsatsified demand at the prevailing price" which is a much harder thing empirically. Demand is itself somewhat hard to measure, but supply is easy, just measure inventories.

You claim that "market clearing" doesn't imply there are no excess inventories, I claim that it does.

We don't end up with surplus inventories (mostly) because the situation is dynamic: both the prices and the people adjust over time

This is the definition of market clearing. The market clearing price is found, and everything sells.

So now it sounds like you agree that in a market that has "cleared," everything sold.

comment by Lumifer · 2014-11-25T05:18:10.748Z · score: 4 (4 votes) · LW · GW

But you shifted it

Nah, I was just too lazy to type out the whole thing. I still mean "at the prevailing price" -- note that all the examples I give work this way.

You claim that "market clearing" doesn't imply there are no excess inventories, I claim that it does.

I am not sure what "excess inventories" are. But let's take a simple example -- a stock market. Let's take IBM which closed tonight at $162.15. This was the market clearing price at the close and the market cleared. Even though the market cleared, the order book wasn't empty -- there were people willing to buy at, say, $162 and people willing to sell at, say, $163. Was there inventory? Sure. Was there excess inventory? I don't know since I have not idea what it means.

The market clearing price is found, and everything sells.

See above. No, not everything sells.

So now it sounds like you agree that in a market that has "cleared," everything sold.

No, that is wrong. A market that cleared is the market which found the market-clearing price and traded at that price all amounts that were there to be traded at that price. That does mean that "everything sold" -- there is nothing which says that all goods on offer are on offer at the current market-clearing price. See the stock market example above.

comment by Stuart_Armstrong · 2014-11-09T14:34:18.248Z · score: 0 (0 votes) · LW · GW

Your phone example seems analogous to "frictional" unemployment, which will resolve itself, given time.

As for why the job market is special: most (western) people derive the majority of their income from a salary. If many people were professional used phone sellers, the analogy would work.

comment by V_V · 2014-11-10T13:10:56.960Z · score: 0 (0 votes) · LW · GW

But even professional manufactures often fail to sell some of their stuff.

comment by cousin_it · 2014-11-10T01:08:03.791Z · score: 0 (0 votes) · LW · GW

The analogy works for firms, no? If a firm can't sell as much stuff, then it can't buy as much other stuff, which feeds into less revenue for other firms, etc.

comment by TheAncientGeek · 2014-11-09T15:01:18.937Z · score: 0 (0 votes) · LW · GW

frictional" unemployment, which will resolve itself, given time.

Assuming, unrealistically , that everything stays constant.

comment by private_messaging · 2014-11-11T08:15:51.574Z · score: 6 (6 votes) · LW · GW

Well, let's consider, say, electrical generation plants that convert coal into electricity, in an isolated country. It is absolutely normal and there's nothing whatsoever mysterious that some fraction of the generating capacity would generally go unused. It's when you start abstracting out the generation capacity as a "good" traded on the market, that it becomes mysterious why it would be "unsold".

If you look at jobs, we have extremely severe discrimination based on origin (needs of citizens absolutely trump in almost all circumstances the needs of foreigners) on top of intrinsically very high cost of moving around or learning a foreign language, or learning a different skill, and regions are thus largely isolated. The labour is essentially a non moveable resource. If you have farmers struck in Antarctica, they will never be able to compete with farmers somewhere less hostile to farming, and they'll be unemployed and actively prevented from working anywhere else (because that sounds like it might drop the wages of the workers in those other regions). And they will be unable to price-cut anyone, because the fertilizer, fuel, and so on still costs the same for these guys, and their produce will cost more than anyone else's produce.

comment by mwengler · 2014-11-24T14:37:40.247Z · score: 1 (1 votes) · LW · GW

It is absolutely normal and there's nothing whatsoever mysterious that some fraction of the generating capacity would generally go unused.

Lets run with that and see how it would apply to unemployment.

Generating capacity is a very general term covering a range of different specific things. Is it a coal-burning baseload plant? A natural gas burning peaker plant? A nuclear plant? A solar plant? One could easily imagine shutting down the coal plant if a nuclear plant is meeting all demand at a price below the cost it would take to buy coal for the coal-burning plant. Then we have a plant which WAS economically useful but IS no longer. We have a plant which requires other inputs, while competing plants are able to produce market-clearing supplies at prices less than the cost of those additional input.

Applying this to people we hypothesize: People are a general category made up of a bunch of specific categories. There are engineers, doctors, lawyers, dancers, and sex workers. There are the "unskilled," people who do not qualify for any of the categories that take years to enter, and can only take jobs where they can be trained on the job, i.e. very low skilled jobs. And indeed, when we look at unemployment we see its presence among the low skilled, but not among the high skilled. And could it be that the unskilled require other economic inputs to make them produce, and those other economic inputs might cost more than the current market rate for the fruits of the unskilled labor? Well, the unskilled require to be managed and trained, and for many productive jobs they require capital investments. Managing the unskilled to produce might be tricky enough that the rate to hire managers might be higher than the output of the unskilled. This seems to be the case in the current market. The most unemployed are the most unemployable, poorly- or un-educated youth are the most unemployed.

comment by Kinsei · 2014-11-09T13:40:11.130Z · score: 6 (6 votes) · LW · GW

Sticky wages are something it's quite possible to study in isolation from the business cycle and it should be no surprise that people have done so. I found a lot of enlightening things in that link, though of course it doesn't answer how much sticky wages end up contributing to unemployment. All the same, though, I don't think I would place much trust in economic models that don't include sticky wages at all.

comment by Stuart_Armstrong · 2014-11-09T15:32:11.496Z · score: 0 (0 votes) · LW · GW

Thanks for that link!

comment by John_Maxwell (John_Maxwell_IV) · 2014-11-23T09:09:10.878Z · score: 5 (5 votes) · LW · GW

This essay by a business school prof argues that companies are irrationally demanding in who they choose to hire: http://www.upenn.edu/gazette/0113/feature2_1.html

comment by Stuart_Armstrong · 2014-11-23T14:19:09.802Z · score: 0 (0 votes) · LW · GW

Thanks!

comment by CCC · 2014-11-10T13:37:29.550Z · score: 3 (3 votes) · LW · GW

The first idea to come to my mind, on reading this article, is that companies do not produce jobs and attempt to sell them to potential employees. Rather, potential employees produce labour, which they attempt to sell to companies (or, in the case of entrepreneurs, which they use to produce goods or services for sale).

Labour is... a very odd good. Most goods are produced, for a cost, and can then be stored and transported for a time before being sold at a profit.

Labour, on the other hand, can be produced at very little cost, but must be used in some manner at the time and place of production and can only be produced at a limited rate per person. Any hours that are not used are lost. Skilled labour is more complicated yet, as it comes in many varieties and most people are unable to produce most varieties (and those that can produce any given type will do so with varying degrees of quality).

This means, among other things, that the available supply of labour depends on the population of employable people; a new person, grown to an employable age, can produce new labour over and above what currently exists.

It seems likely that much of the difference between the job market and the ideal market can be traced back to just how different labour is from other goods.

comment by Nebu · 2014-11-11T06:59:23.671Z · score: 1 (1 votes) · LW · GW

The first idea to come to my mind, on reading this article, is that companies do not produce jobs and attempt to sell them to potential employees. Rather, potential employees produce labour, which they attempt to sell to companies (or, in the case of entrepreneurs, which they use to produce goods or services for sale).

What kind of predictive power does this belief have? I.e. why does this inversion mean that the labour market is "different", but performing the inversion "stores don't sell goods to consumers for money, consumers sell money to stores for goods" does not make the goods market similarly "different"?

comment by CCC · 2014-11-11T07:56:00.280Z · score: 2 (2 votes) · LW · GW

It is not the inversion which makes the labour market different; rather, it is the nature of labour. The inversion merely highlights this difference.

why does ... performing the inversion "stores don't sell goods to consumers for money, consumers sell money to stores for goods" does not make the goods market similarly "different"?

Simple. Goods are, as a general rule, produced by a mix of raw materials and labour; some wood, some tools, and a few other bits and pieces in the hands of a competant craftsman can turn into a rocking horse.

The consumer's money is also produced by a mix of raw materials and labour; a mechanic obtains raw materials from his employer, labours for some hours, and obtains money. This mechanic may then return home and spend his money on the rocking horse as a gift for his child.

Either way around, whether it is seen as spending money to obtain a rocking horse, or spending a rocking horse to obtain money, the transaction is similar; something that is produced, from raw materials, using labour, is exchanged for something that is produced, from raw materials, using labour.

The job market is different because labour is not produced from raw materials using labour. Labour that goes unused is not stored for later, but lost entirely; labour cannot be resold (though the products of labour often can).

What kind of predictive power does this belief have?

This is difficult, because my knowledge of economics is relatively poor. However, I shall attempt a few predictions:

  • Since labour not used is lost, and worthless, people will prefer taking a job with a low salary to remaining unemployed; even when that low salary is insufficient to live off of.
  • Since unskilled labour can be produced, in roughly equivalent quantities, by almost anyone, market forces will tend to push the cost down, far below what allows the labourers to live in any reasonable comfort.
  • Skilled labour is rarer, and thus can be sold for higher salaries, but the process of obtaining those skills is long; thus, if there is a particular demand for a certain skill over and above the available (finite) supply, it will take a long time (possibly years) for the market to adjust. In that interval, the market is likely to adjust by finding ways to temporarily manage without that skill, where possible. The article above talked about frictions; this may be the largest friction in the job market.
  • On the other hand, if a market for a given skill has significantly more supply than demand, then the producers of this type of skilled labour may find themselves unable to sell their labour for much more than unskilled labour, regardless of how much effort it took to obtain the skills in question.
comment by Vaniver · 2014-11-25T15:23:50.033Z · score: 4 (4 votes) · LW · GW

On the other hand, if a market for a given skill has significantly more supply than demand, then the producers of this type of skilled labour may find themselves unable to sell their labour for much more than unskilled labour, regardless of how much effort it took to obtain the skills in question.

See the many creative and performing professions, where labor costs are often comparable to working retail, as examples. Those have more of a lottery flavor to them than unskilled labor does, where the best artists/musicians/actors/athletes can make much more than the median, but the median is often low. (If you've ever seen a sign lamenting that teachers don't get paid as much as professional athletes, go to the BLS website and compare their median salaries.)

comment by CCC · 2014-11-26T09:44:16.887Z · score: 0 (0 votes) · LW · GW

Yes, those are good examples.

comment by mwengler · 2014-11-24T15:04:03.952Z · score: 2 (2 votes) · LW · GW

Labour, on the other hand, can be produced at very little cost, but must be used in some manner at the time and place of production and can only be produced at a limited rate per person.

There are many goods like labor in this respect. Airplane seats on a flight. Seats in a restaurant at dinner time. Minutes of talk or megabytes of data in a cellular smartphone network.

Restaurants and air transport are notoriously competitive businesses, notorious in that the ability to lose money investing in these markets is well-storied. Maybe labor, or at least unskilled labor, is, or should be, just as notorious. We have a supply of it that it is not at all tied to demand, how many people bring an unskilled worker into the world in response to market demand?

IN the case of seats in restaurants and airplanes, and to a lesser extent cell phone minutes, much is sold below the average cost to produce it. The lowest fares paid on a flight are typically much less than half the highest, or even average fare. "Nighttime and weekend" minutes on cell plans are typically "free," producing no marginal revenue to the cell carrier, simply given away to attract customers who might buy some daytime minutes. Restaurants will have early bird specials and charge less at lunchtime because seats are empty, and will publish coupons and groupons when their seats are empty during prime time.

And still even with these price reductions, if the market clears with too many empty seats and the price drifts down below the marginal cost of serving a customer, restaurants remain unfilled, airline flights are cancelled (putting airplanes into unemployment).

So can the unskilled have a fire sale, as it were, on their unskilled hours of labor? Not with minimum wages enforced. In the US, even unpaid internships are being attacked as "illegal exploitation" of the people who want them by the people willing to grant them.

Anyway, the fact that labor is a "good" like airplane seats, restaurant seats, and cellphone minutes, that can't be saved to be used later, does make it harder to get full utilization of the supply. Good catch!

comment by Vaniver · 2014-11-25T15:03:12.480Z · score: 1 (1 votes) · LW · GW

We have a supply of it that it is not at all tied to demand, how many people bring an unskilled worker into the world in response to market demand?

I was under the impression that this actually was the case a few centuries ago- colonial American fertility was significantly higher than European fertility.

comment by CCC · 2014-11-25T08:18:43.835Z · score: 0 (0 votes) · LW · GW

So can the unskilled have a fire sale, as it were, on their unskilled hours of labor?

Yes, they can, and yes, throughout history, they have been; and this fire sale involves selling the labour for less than it costs to produce, where the production cost is equal to the cost of food and shelter sufficient to keep the worker and his family alive and in reasonable comfort. (Not luxury, mind you, just comfort).

This leads to clear humanitarian problems (historically, slavery was a major one), and I'm pretty sure that the entire point of the minimum wage is to avoid said humanitarian problems by making the fire sale impossible.

There are many goods like labor in this respect. Airplane seats on a flight. Seats in a restaurant at dinner time. Minutes of talk or megabytes of data in a cellular smartphone network.

You are right, there are clear and strong similarities here. There is still one important, though minor, point of distinction, and it is this; it takes several years and quite a bit of food to create a new labourer (while an entire new restaurant with plenty of chairs can be created in a mere few months, or faster if the building is already in place). This introduces a fairly major friction to the task of increasing the supply (major enough that if more labour is necessary than can be easily supplied, an employer might look to automation instead, or even go out of business).

But yes, labour is clearly the same category as cellphone minutes or restaurant seats. Which is interesting; I hadn't realised that there were other goods in the same category...

comment by mwengler · 2014-11-25T09:32:08.950Z · score: 4 (4 votes) · LW · GW

Yes, they can, and yes, throughout history, they have been; and this fire sale involves selling the labour for less than it costs to produce, where the production cost is equal to the cost of food and shelter sufficient to keep the worker and his family alive and in reasonable comfort. (Not luxury, mind you, just comfort).

This leads to clear humanitarian problems (historically, slavery was a major one), and I'm pretty sure that the entire point of the minimum wage is to avoid said humanitarian problems by making the fire sale impossible.

It is NOT generally true that slaves were "paid" below a living wage. That would mean that healthy slaves were brought in, not fed enough to stay alive, and then died. In fact slaves were fed not only enough to stay alive but enough to breed and to feed babies, and their babies grew up to be slaves,

Slaves were not paid enough that they would voluntarily do the jobs they did. But they were paid enough to stay alive, and even to reproduce.

comment by CCC · 2014-11-26T09:41:18.416Z · score: 0 (0 votes) · LW · GW

I am sure that many, even most slaves were in fact paid enough to stay alive (more specifically, they were probably fed and housed on the job); just not enough to stay alive in what I would consider reasonable comfort. And, in at least some cases, not at all once they were too old to work. (Some would have, I'm sure, been brought in healthy and than starved and died, through sheer incompetence on the part of the owner if nothing else; but those would have been the exception rather than the rule).

comment by Gunnar_Zarncke · 2014-11-09T00:34:44.133Z · score: 3 (5 votes) · LW · GW

Another class is excluded: Workers have the option to voice their opinon and thereby affect the market on a higher level. See Hirschman http://en.wikipedia.org/wiki/Exit,_Voice,_and_Loyalty

I mentioned this on LW here: http://lesswrong.com/lw/isk/a_voting_puzzle_some_political_science_and_a_nerd/

comment by [deleted] · 2015-01-25T02:22:22.272Z · score: 2 (2 votes) · LW · GW

I like this post, because I find it very familiar, but it is familiar because it is reminiscent of the sorts of confusions and mix-ups that can result from half an economics education. And please allow me to push back on some points, to invite your further thoughts and considerations.

Just going in order, you treat classical economists as if they adhered to a revealed preference theory. That theory is Paul Samuelson's, introduced at the tail end of neoclassical economics. It cannot explain anything the classical economists did. And in general, those who are happy not to work are not unemployed, they are nonemployed. Only people who want a job but cannot get one are unemployed, so the revealed preference explanation cannot explain unemployment in any case.

The classical economists did indeed blame a lot of unemployment on union activity and price floors. They were not wrong to do so, either. Both quite predictably create unemployment.

Irrationality is not a charge that should be thrown around lightly in economics. There is nothing about the traditional model of rationality that says people cannot tie their status to their nominal wealth. After all, it is really more a question of whether others do so, isn't it? Nor is status necessary to invoke: workers are ignorant about the state of aggregate demand and their value to the company, so they use their coworkers and past experiences as references.

Some of the frictions you cite, such as changes in technology, are not frictions. Less productive workers are simply paid less, not unemployed.

Regarding all the difficulties of firing workers and changing jobs and so on, why doesn't a series of markets emerge to address this very problem? If one can turn unemployed resources into employed resources, then one can potentially profit.

Joseph Stiglitz on information and the invisible hand.

Janet Yellen on efficiency wages and unemployment.

Alchian has a good paper or three on related subjects, am thinking it's called "Information Costs," but Google brings up the wrong paper.

Macroeconomics is not based on the observation that people spend what they earn. That observation is pretty old, probably older than economics itself, if you take Adam Smith as the starting point. And neither Keynesians nor monetarists really exist today. We understand now that Keynes and Old Keynesianism are basically wrong, and New Keynesianism incorporates those criticisms into a new research program.

Monetary theories of recession and unemployment go back to at least the days of Thomas Malthus, Jean-Baptiste Say, and John Stuart Mill. Then you have Jevons's sunspots, the Austrian theory, and the rudimentary development of real business cycle theory as well, all before Keynes.

The circular flow model does not predict that a drop in spending creates a recession. The model just isn't meant to do that. Markets have equilibrating properties that pull firms to discovering what consumers demand and making full use of resources. And It should be pretty obvious from experience that that mechanism must break down somewhere. Otherwise the next time you lose a penny the economy will collapse. It just does not describe any theory of unemployment, not even really the underconsumptionist theory. See the permanent income hypothesis for one example--Milton Friedman's major break from Keynes.

You don't mention real business cycle or new classical theory. They are rather academically dominant or recently were.

Since, as you seem to know, spending is income, reducing everyone's income by 50% changes nothing. Everything goes down by 50%, and the economy is as it was before.

Of course people won't work when the pay is too low. Or, if you think otherwise, will you please clean my bathroom every day for a dollar? Or point me to someone unemployed who will? And employers will not hire when the cost is too high--though I don't doubt your bathroom-cleaning proficiency, I certainly wouldn't pay you $100 for the service.

You don't discuss the natural rate of unemployment at all.

No one is a Keynesian or a monetarist anymore, so most academic economists disagree with you about the business cycle. And I am not sure if even real business cycle theorists seriously will defend the argument that the oil shocks of the 70s caused a recession.

Yes, the media is pretty bad about this.

comment by Stuart_Armstrong · 2015-01-27T11:32:47.921Z · score: 2 (2 votes) · LW · GW

Thanks for your comments! It seems you are more knowledgeable in this field, so I'll follow your views on most of these things (though I had read both papers you linked to).

The one thing I will disagree with is on terminology discussions. Nonemployment vs unemployment is not particularly useful, as its hard to observe the difference from the outside, and they overlap and can change within the same person (sometimes from day to day). And I know that some economists tie themselves in knots to avoid ever describing someone as "irrational", but that's entirely terminology - everyone agrees on what the behaviour is, and often on what motivates it, and the whole discussion is whether it merits the label rational or not. I personally prefer to use "irrational", as it's a useful descriptive term which would otherwise be almost empty of content. But that's just a preference.

comment by [deleted] · 2015-01-28T03:28:37.113Z · score: 2 (2 votes) · LW · GW

Oh, my pleasure. Economics is super neat and really changes the way you look at things, so I'm always super happy when someone gets into it and starts learning about this stuff. And then I write something super long telling them how super wrong they are....

Actually, the distinction between unemployed and nonemployed is very important. First of all, the blurring of terminology leads to more of the same, as some of the comments about frictions show. And more to the point, whether someone is unemployed, in the economics jargon, is a question about how they relate to an equilibrating market price. All the questions of information, friction, and macroeconomic disturbances boil down to the dynamics of this system. As the comments show, by blurring the lines between nonemployment and unemployment, a very confused sort of analysis results where markets never clear, frictions are rampant and virtually insurmountable, and macroeconomics seems divorced from common experience.

As for irrational and rational, fine, words are...wordy, but in a post about economics, readers might understandably think that you are using the sense of irrationality peculiar to economics rather than the sense of irrationality peculiar to this site. And, as a matter of personal and observed experience, I think you will go a lot farther in economics by calling nothing irrational under all possible explanations have been exhausted--because in economics, whatever you intend to intend by the word, "irrational" means "I'm done here." Trying to come up with reasons why an individual resisting a nominal wage decrease is actually rational can be very elucidating. Relative status is only one possible explanation, and it could be a proxy for more, um, financially motivations.

comment by Stuart_Armstrong · 2015-01-28T09:52:30.032Z · score: 3 (3 votes) · LW · GW

Cheers!

is a question about how they relate to an equilibrating market price.

And this is, to my mind, a misleading though possibly useful simplification. People exhibit path dependence, moods, have issues of pride, resentment, have possibly fluctuating principles and energy levels, etc. Pretending that there is a single market price at which someone would work at, and using this to distinguish between unemployed and nonemployed might be useful in a model, but is a mistake if taken as a view of reality (and can lead to excessive respect for concepts such as "revealed preferences", which are are only partially true).

There's a reason that people stereotype economics as over-simplified, and its because many people do use the models in an over-simplified manner.

I feel the same about "irrational". Someone can be economically rational while behaving in a stupid, counter-productive, and biased fashion. However, because of the connotations of "rational" in everyday speech, some people seem to feel that that's not possible.

comment by [deleted] · 2015-01-29T03:34:06.026Z · score: 1 (1 votes) · LW · GW

People will work at many prices. I'll work practically anything at a million dollars an hour, and even more so at a billion dollars an hour. There are rather fewer prices, however, that will equate quantity supplied to quantity demanded, where both quantity supplied and quantity demanded should be understood as points on a supply/demand schedule describing the amount people want to sell/buy at that particular price.

I'm working on a series of articles about economics I hope to start posting fairly soon. I'm sure you'll find them interesting....

comment by Kenny · 2014-11-14T19:53:07.733Z · score: 2 (4 votes) · LW · GW

This is a fantastic post and I'd really like to see more like it, on any topic really.

It'd be really really cool if we could maintain them as wiki articles too, i.e. update them with new info. Is that feasible? Would you, Stuart, be interested in doing that for this topic?

Here's some comments from an economist blogger I follow (that found you thru Yvain's blog).

comment by enfield · 2014-11-11T03:54:59.429Z · score: 1 (1 votes) · LW · GW

this is from henry george's book progress and poverty. he explains why there is the "enforced idleness" i.e. unemployment. i quite liked this part but i know its a bit dated and i don't really get economics. i think this would be one of those macroeconomic explanations for it.

" [22] All trade, let it be remembered, is the exchange of commodities for commodities, and hence the cessation of demand for some commodities, which marks the depression of trade, is really a cessation in the supply of other commodities. That dealers find their sales declining and manufacturers find orders falling off, while the things which they have to sell, or stand ready to make, are things for which there is yet a widespread desire, simply shows that the supply of other things, which in the course of trade would be given for them, has declined. In common parlance we say that "buyers have no money," or that "money is becoming scarce," but in talking in this way we ignore the fact that money is but the medium of exchange. What the would-be buyers really lack is not money, but commodities which they can turn into money -- what is really becoming scarcer is produce of some sort. The diminution of the effective demand of consumers is therefore but a result of the diminution of production.

[23] This is seen very clearly by storekeepers in a manufacturing town when the mills are shut down and operatives thrown out of work. It is the cessation of production which deprives the operatives of means to make the purchases they desire, and thus leaves the storekeeper with what, in view of the lessened demand, is a superabundant stock, and forces him to discharge some of his clerks and otherwise reduce his demands. And the cessation of demand (I am speaking, of course, of general cases and not of any alteration in relative demand from such causes as change of fashion), which has left the manufacturer with superabundant stock and compelled him to discharge his hands, must arise in the same way. Somewhere, it may be at the other end of the world, a check in production has produced a check in the demand for consumption. That demand is lessened without want being satisfied, shows that production is somewhere checked.

[24] People want the things the manufacturer makes as much as ever, just as the operatives want the things the storekeeper has to sell. But they do not have as much to give for them. Production has somewhere been checked, and this reduction in the supply of some things has shown itself in cessation of demand for others, the check propagating itself through the whole framework of industry and exchange. Now, the industrial pyramid manifestly rests on the land. The primary and fundamental occupations, which create a demand for all others, are evidently those which extract wealth from nature, and, hence, if we trace from one exchange point to another, and from one occupation to another, this check to production, which shows itself in decreased purchasing power, we must ultimately find it in some obstacle which checks labor in expending itself on land. And that obstacle, it is clear, is the speculative advance in rent, or the value of land, which produces the same effects as (in fact, it is) a lockout of labor and capital by landowners. This check to production, beginning at the basis of interlaced industry, propagates itself from exchange point to exchange point, cessation of supply becoming failure of demand, until, so to speak, the whole machine is thrown out of gear, and the spectacle is everywhere presented of labor going to waste while laborers suffer from want.

[25] This strange and unnatural spectacle of large numbers of willing men who cannot find employment is enough to suggest the true cause to whosoever can think consecutively. For, though custom has dulled us to it, it is a strange and unnatural thing that men who wish to labor, in order to satisfy their wants, cannot find the opportunity -- as, since labor is that which produces wealth, the man who seeks to exchange labor for food, clothing, or any other form of wealth, is like one who proposes to give bullion for coin, or wheat for flour. We talk about the supply of labor and the demand for labor, but, evidently, these are only relative terms. The supply of labor is everywhere the same -- two hands always come into the world with one mouth, twenty-one boys to every twenty girls; and the demand for labor must always exist as long as men want things which labor alone can procure. We talk about the "want of work," but, evidently, it is not work that is short while want continues; evidently, the supply of labor cannot be too great, nor the demand for labor too small, when people suffer for the lack of things that labor produces. The real trouble must be that supply is somehow prevented from satisfying demand, that somewhere there is an obstacle which prevents labor from producing the things that laborers want.

[26] Take the case of any one of these vast masses of unemployed men, to whom, though he never heard of Malthus, it today seems that there are too many people in the world. In his own wants, in the needs of his anxious wife, in the demands of his half-cared-for, perhaps even hungry and shivering children, there is demand enough for labor, Heaven knows! In his own willing bands is the supply. Put him on a solitary island, and though cut off from all the enormous advantages which the co-operation, combination, and machinery of a civilized community give to the productive powers of man yet his two hands can fill the mouths and keep warm the backs that depend upon them. Yet where productive power is at its highest development they cannot. Why? Is it not because in the one case he has access to the material and forces of nature, and in the other this access is denied?

[27] Is it not the fact that labor is thus shut off from nature which can alone explain the state of things that compels men to stand idle who would willingly supply their wants by their labor? The proximate cause of enforced idleness with one set of men may be the cessation of demand on the part of other men for the particular things they produce, but trace this cause from point to point, from occupation to occupation, and you will find that enforced idleness in one trade is caused by enforced idleness in another, and that the paralysis which produces dullness in all trades cannot be said to spring from too great a supply of labor or too small a demand for labor, but must proceed from the fact that supply cannot meet demand by producing the things which satisfy want and are the object of labor."

comment by 27chaos · 2014-11-24T22:47:01.925Z · score: 0 (0 votes) · LW · GW

His claim that a shortfall in supply can cause a shortfall in demand makes sense. But he goes beyond that and claims without any real justification that every shortfall in demand is the consequence of a shortfall in supply, which contradicts modern economic thought. One reason that quantity demanded might decline other than a production problem would be if there's an increase in production by a competitor whose goods are superior or cheaper than yours. Another potential reason would be an increase in uncertainty - if say, a country is on the brink of war, people in that country will be inclined to hold on to their money rather than to spend it on luxury goods, and this can cause an economic contraction.

I guess in a roundabout nonfalsifiable kind of way it might be hypothetically possible that a shortage in supply on the other side of the globe is the indirect root cause of the war, but this isn't very helpful for figuring out anything useful about the economy even if it does happen to be true, and we have no reason to think that's so.

He kind of comes close to conflating "shortfall in supply" with "scarcity", but those are two different concepts in economic thought. A shortfall in supply is someone not producing as much as they ought to have to maximize their company's profit. Scarcity is the idea that no matter how much is produced people will always want more.

Disclaimer: barely paid attention when this was explained to me in class.

comment by Strange7 · 2014-11-28T00:57:45.481Z · score: 0 (0 votes) · LW · GW

Superior competitors don't tend to cause widespread unemployment, though. People just go work for the company that's on the rise.

As for uncertainty about a coming war... he's saying that it all comes back to natural resources, access to land, and sure enough that tends to be what wars are about.

comment by 27chaos · 2014-11-30T02:23:15.102Z · score: 1 (1 votes) · LW · GW

Okay, thought things through.

Not every change in material resources is a change in supply. For example, the rate at which the Sun burns energy is not controlled by humans, nor was it even known to us in the past. However, the Sun's energy can effect demand nonetheless - for example, ice cream might become more popular if the sun heats up.. Thus the sun is a counterexample to the claim that changes in demand are all the result of changes in supply.

You might claim that the change in (quantity of) ice cream demanded is actually the consequence of increased ice cream production. That is true in the sense that if no more ice cream was produced then no more ice cream would be purchased. But we can also ask what caused the company to choose to increase production, and the clear answer is that the company thought the demand for ice cream would increase as a consequence of the heat wave. If there was no anticipation of increased demand due to external reasons, the ice cream company would not increase production and thus would miss out on potential profit.

comment by Strange7 · 2014-11-30T09:02:42.966Z · score: -1 (1 votes) · LW · GW

Just to make completely sure I understand you here... you went looking for something that's not a natural resource underlying major economic issues, but could still affect those issues, and the best answer you could come up with was the sun ? The local star, that gigantic nuclear furnace whose radiant energy is the source of power for all photosynthetic life on earth, excepting maybe some geothermal-powered grow-lights in Greenland or something. That sun, that's the one you're referring to?

If solar energy flux abruptly changed by even one percent, up or down, or was widely anticipated to do so, i don't think unemployed ice cream manufacturers and salespeople would be the main economic consequence, or even noticeable among all the other chaos.

comment by 27chaos · 2014-11-30T09:14:27.377Z · score: 0 (2 votes) · LW · GW

Supply is defined as that which is produced by human beings, not that which is made of physical matter. Otherwise, saying that demand only responds to changes in supply would fail to constrain our expectations any more than the laws of physics do. But we're pursuing a different level of analysis when we engage economic questions.

You are looking at aspects of my example that are irrelevant to my argument. My point is that human decisions and innovations are not the only factors behind changes in demand. Whether or not we restrict our analysis to the ice cream market alone, the point stands that demand would be changed if the Sun's behavior changed and thus we need to look at things other than changes to supply if we want to accurately predict changes in demand.

comment by Strange7 · 2014-12-01T20:56:24.506Z · score: 0 (0 votes) · LW · GW

Henry George was looking at the labor market, and pointing out that you can't really understand the causes of large-scale unemployment, "the paralysis which produces dullness in all trades," without looking all the way back up the supply chain, if necessary to natural resources and how they're being used or prevented from use, until you find something necessary that's not being supplied. Can you find a counterexample to THAT claim, a cause for general unemployment which can't be traced back to a lack of supply?

comment by 27chaos · 2014-12-02T04:07:19.276Z · score: 0 (0 votes) · LW · GW

something necessary that's not being supplied

If by necessary you mean "in demand", then yes I agree, otherwise I don't know what you mean. You need to look at what products have unmet demand if you think the market's being prevented from reaching full employment. But examining supply chains from the ground up isn't a requirement for this, and actually no one understands the economy that well as it's computationally impossible. So we look at intermediate simplified components of the supply chain and at demand itself. There are times when looking at an extremely detailed picture is necessary, but I don't think that's always so.

Two exceptions to this:

  1. Governments can employ people to do jobs that aren't demanded by the market.

  2. There might not be enough resources for people to do any work that's in demand. For example, if I am a farmer in a developing country and foreign food imports are priced lower than what my costs are, I will probably not be a farmer for much longer.

comment by 27chaos · 2014-12-02T04:06:25.352Z · score: 0 (0 votes) · LW · GW

something necessary that's not being supplied

If by necessary you mean "in demand", then yes I agree, otherwise I don't know what you mean. You need to look at what products have unmet demand if you think the market's being prevented from reaching full employment. But examining supply chains from the ground up isn't a requirement for this, and actually no one understands the economy that well as it's computationally impossible. So we look at intermediate simplified components of the supply chain and at demand itself. There are times when looking at an extremely detailed picture is necessary, but I don't think that's always so.

Two exceptions to this:

  1. Governments can employ people to do jobs that aren't demanded by the market but help society.

  2. There might not be enough resources for people to do any work that's in demand. To look at a small example, if I am a farmer in a developing country and foreign food imports are priced lower than what my costs are, I will probably not be a farmer for much longer.

comment by 27chaos · 2014-12-02T04:05:42.199Z · score: 0 (0 votes) · LW · GW

something necessary that's not being supplied

If by necessary you mean "in demand", then yes I agree, otherwise I don't know what you mean. You need to look at what products have unmet demand if you think the market's being prevented from reaching full employment. But examining supply chains from the ground up isn't a requirement for this, and actually no one understands the economy that well as it's computationally impossible. So we look at intermediate simplified components of the supply chain and at demand itself. There are times when looking at an extremely detailed picture is necessary, but I don't think that's always so.

Two exceptions to this:

  1. Governments can employ people to do jobs that aren't demanded by the market but help society.

  2. There might not be enough resources for people to do any work that's in demand. For example, if I am a farmer in a developing country and foreign food imports are priced lower than what my costs are, I will probably not be a farmer for much longer.

comment by 27chaos · 2014-11-30T09:08:15.033Z · score: 0 (0 votes) · LW · GW

Supply is defined as that which is produced by human beings, not that which is made of physical matter. Scarcity is the word referring to limitation of resources, not supply.

You're intentionally looking at aspects of my example that are irrelevant to the point I was making. My point is that human decisions and innovations are not the only factors that change demand. Whether or not we restrict our analysis to the ice cream market alone, the point stands.

comment by 27chaos · 2014-11-28T07:03:13.403Z · score: 1 (1 votes) · LW · GW

Superior competitors don't tend to cause widespread unemployment, though. People just go work for the company that's on the rise.

I don't think it's this simple. Suppose skills are nontransferable. Suppose the other company is in a different country. Suppose there's only a limited demand for the goods produced and the other company uses technology that lets it fewer workers than the first one did. None of these seem to have anything to do with supply shortages.

As for uncertainty about a coming war... he's saying that it all comes back to natural resources, access to land, and sure enough that tends to be what wars are about.

Not exactly. Wars are about a lot of things, like fear one will be attacked by a neighbor or the desire to stop Communist ideology. The claim that every war is at root an issue of natural resources is only defensible if you make it extremely complex and thus impossible to falsify. Additionally, like I said before, that kind of situation is less about insufficient supply and more about living under conditions of scarcity which no economy can avoid.

comment by Strange7 · 2014-11-28T16:23:56.106Z · score: 1 (1 votes) · LW · GW

The neighbor is possibly going to attack... why? Maybe because they want something you have, that they could seize by killing you? Such as your land? The term "lebensraum" comes to mind.

Communist ideology, likewise, exists to promote communist political policies, which have a number of major differences from capitalist (or, say, monarchist) policies when it comes to how natural resources should be exploited on industrial scales and how the products of that industry should be directed. Workers controlling the means of production, and so on.

As for falsifiability, it would be easy enough to imagine people going to war over a set of political issues (let's say, calendar reform or the right to be openly homosexual) which have no clear implications one way or another for industry. It's just, that doesn't happen. Gulf War 2? Oil. American civil war? Cotton, by way of slavery. WWII? Germany and Japan trying to bootstrap. Sub-saharan bloodbaths? Closely correlated to droughts, with a time lag as food scarcity propagates through the system. Without an underlying resource conflict, no war occurs.

There's always more to it than that, of course, because people are complicated. The first world war, for example, was a horrific morass of misplaced optimism and lost purposes, but when you look at the promises the leaders were making, it was always "no, really, we'll be able to push ahead and capture valuable territory at low cost THIS time!" and the reparations afterward were transparently a transfer of resources from the losers to the winners.

comment by Strange7 · 2014-11-29T20:40:05.880Z · score: 0 (0 votes) · LW · GW

Suppose there's only a limited demand for the goods produced and the other company uses technology that lets it fewer workers than the first one did.

"Labor-saving" innovations are simply increases in efficiency. If the new process allows more of the same (or equivalent) goods to be produced with less inputs, the price will drop and demand will increase. Significantly lower cost might even open up completely new applications for the goods.

comment by 27chaos · 2014-11-30T01:22:51.896Z · score: 0 (0 votes) · LW · GW

I think I need to start over. Give me a while to think.

comment by 27chaos · 2014-11-30T02:20:40.023Z · score: 0 (0 votes) · LW · GW

Okay, thought things through.

Not every change in material resources is a change in supply. For example, the rate at which the Sun burns energy is not controlled by humans, nor was it even known to us in the past. However, the Sun's energy can effect demand nonetheless - for example, ice cream might become more popular if the sun heats up.. Thus the sun is a counterexample to the claim that changes in demand are all the result of changes in supply.

You might claim that the change in ice cream demanded is actually the consequence of increased ice cream production. That is true in the sense that if no more ice cream was produced then no more ice cream would be purchased. But we can also ask what caused the company to choose to increase production, and the clear answer is that the company increased production because they thought the demand for ice cream would increase. Heat itself is meaningless except in its anticipated consequence for demand, therefore the counterexample is valid. If there was no anticipation of increased demand due to external reasons, the company would not increase their production and would miss out on potential profit.

comment by 27chaos · 2014-11-30T02:17:58.329Z · score: 0 (0 votes) · LW · GW

Okay, thought things through.

Not every change in material resources is a change in supply. For example, the rate at which the Sun burns energy is not controlled by humans, nor even known to us. However, the Sun's energy will effect demand nonetheless - ice cream will become more popular if the sun heats up, and it will be purchased more often. Thus the sun is a counterexample to the claim that changes in demand are all the result of changes in supply.

You might claim that the change in ice cream demanded is actually the consequence of increased ice cream production. That is true in the sense that if no more ice cream was produced then no more ice cream would be consumed. But we can also ask what caused the company to choose to increase production, and the clear answer is that the company increased production because they thought the demand for ice cream would increase. Heat itself is meaningless except in its anticipated consequence for demand, therefore the counterexample is valid.

comment by 27chaos · 2014-11-28T06:43:01.071Z · score: 0 (0 votes) · LW · GW

Superior competitors don't tend to cause widespread unemployment, though. People just go work for the company that's on the rise.

I don't think it's this simple. Suppose skills are nontransferable. Suppose the other company is in a different country. Suppose there's only a limited demand for the goods produced and the other company uses technology that lets it fewer workers than the first one did. None of these seem to have anything to do with supply shortages.

As for uncertainty about a coming war... he's saying that it all comes back to natural resources, access to land, and sure enough that tends to be what wars are about.

Not exactly. Wars are about a lot of things, like fear one will be attacked by a neighbor or the desire to stop Communist ideology. The claim that every war is at root an issue of natural resources is only defensible if you make it extremely complex and thus impossible to falsify. Additionally, like I said before, that kind of situation is less about insufficient supply and more about living under conditions of scarcity which no economy can avoid.

comment by 27chaos · 2014-11-28T06:41:42.303Z · score: 0 (0 votes) · LW · GW

Superior competitors don't tend to cause widespread unemployment, though. People just go work for the company that's on the rise.

I don't think it's this simple. Suppose skills are nontransferable. Suppose the other company is in a different country. Suppose there's only a limited demand for the goods produced and the other company uses technology that lets it fewer workers than the first one did.

As for uncertainty about a coming war... he's saying that it all comes back to natural resources, access to land, and sure enough that tends to be what wars are about.

Not exactly. Wars are about a lot of things, like fear one will be attacked by a neighbor or the desire to stop Communist ideology. The claim that every war is at root an issue of natural resources is only defensible if you make it extremely complex and thus impossible to falsify. Additionally, like I said before, that kind of situation is less about insufficient supply and more about living under conditions of scarcity which no economy can avoid.

comment by 27chaos · 2014-11-28T06:39:32.477Z · score: 0 (0 votes) · LW · GW

Superior competitors don't tend to cause widespread unemployment, though. People just go work for the company that's on the rise.

I don't think it's this simple. Suppose skills are nontransferable. Suppose the other company is in a different country. Suppose there's only a limited demand for the goods produced and the other company can thus higher fewer workers than the first one did.

As for uncertainty about a coming war... he's saying that it all comes back to natural resources, access to land, and sure enough that tends to be what wars are about.

Not exactly. Wars are about a lot of things, like fear one will be attacked by a neighbor or the desire to stop Communist ideology. The claim that every war is at root an issue of natural resources is only defensible if you make it extremely complex and thus impossible to falsify. Additionally, like I said before, that kind of situation is less about insufficient supply and more about living under conditions of scarcity which no economy can avoid.

comment by 27chaos · 2014-11-28T06:39:00.405Z · score: 0 (0 votes) · LW · GW

Superior competitors don't tend to cause widespread unemployment, though. People just go work for the company that's on the rise.

I don't know think it's this simple. Suppose skills are nontransferable. Suppose the other company is in a different country. Suppose there's only a limited demand for the goods produced and the other company can thus higher fewer workers than the first one did.

As for uncertainty about a coming war... he's saying that it all comes back to natural resources, access to land, and sure enough that tends to be what wars are about.

Not exactly. Wars are about a lot of things, like fear one will be attacked by a neighbor or the desire to stop Communist ideology. The claim that every war is at root an issue of natural resources is only defensible if you make it extremely complex and thus impossible to falsify. Additionally, like I said before, that kind of situation is less about insufficient supply and more about living under conditions of scarcity which no economy can avoid.

comment by dxu · 2014-11-28T06:40:06.568Z · score: 1 (1 votes) · LW · GW

the other company can thus higher fewer workers than the first one did.

Uh... not to be a pedant, but are you sure you didn't mean "hire" there?

comment by 27chaos · 2014-11-28T06:45:33.904Z · score: 0 (0 votes) · LW · GW

You've retracted your comment. Will you now delete it? I want to make this entire chain of comments disappear including the empty box above.

comment by dxu · 2014-11-28T06:50:32.464Z · score: 0 (0 votes) · LW · GW

Apologies, but I'm somewhat new here. I'm not seeing an easy way to delete a comment here (as opposed to retracting it); could you be so kind as to tell me how it's done? (Sorry again for any trouble!)

comment by 27chaos · 2014-11-28T06:52:29.735Z · score: 0 (0 votes) · LW · GW

No problem, you're actually being very nice and helpful.

I'm not sure if there's any easier official way it's supposed to be done, but I normally click on the retract button in the bottom right of the comment, then refresh the page, and then click on the button in the bottom right of the comment (which will now be the delete button).

Edit: I don't see any button for my above comment. I think we have to delete all the upstream comments first before it lets us delete these ones. Or maybe these lower comments aren't allowed to be deleted at all, in which case I'm sorry about this, lol. Thanks for trying, if that's what's happened!

comment by dxu · 2014-11-28T06:56:43.960Z · score: 0 (0 votes) · LW · GW

Did you get my PM?

Edit: Yep, now that this comment doesn't have any replies attached, it is indeed delete-able. We'll have to work our way up, if that's okay with you.

Edit2: Please send me a PM if you see this message; then I'll know it's safe to delete it.

comment by 27chaos · 2014-11-28T06:57:59.897Z · score: 0 (0 votes) · LW · GW

LOL this is hilarious. I vote we just leave this for posterity, (or let a moderator clean it up). I think we'll only make things worse if this keeps going. Thanks for the fun.

comment by 27chaos · 2014-11-28T06:42:45.355Z · score: 0 (0 votes) · LW · GW

Apologies, would you mind deleting your comment here? I was trying to avoid the ugly edit star.

comment by shminux · 2014-11-07T19:17:53.974Z · score: 1 (1 votes) · LW · GW

Do you know of any numerical models of economics which simulate and track each person (employer and employee) with their skills, preferences and such?

comment by Punoxysm · 2014-11-08T03:08:56.035Z · score: 6 (6 votes) · LW · GW

People make such models, but unknown parameters proliferate so rapidly that it's hard to say these simulations are accurate or even useful.

comment by [deleted] · 2015-08-23T13:59:17.991Z · score: 0 (0 votes) · LW · GW

I think I'd be happiest as a NEET for the short term future but I'm scared it will become a lifestyle. Is it plausible that NEETS might get exterminated, forced into labour or left to starve/get-malnourished in Western countries like Australia within the next 50 years?

Are NEETs just passive aggressive and bad at externalising, like expressing anger which may motivate them to get stuff done?

comment by Lumifer · 2015-08-24T02:47:22.608Z · score: 1 (1 votes) · LW · GW

forced into labour

You mean, not being able to stay on welfare the entire life?

comment by [deleted] · 2015-08-23T16:11:37.393Z · score: 0 (0 votes) · LW · GW

I have a hard time imagining such a situation happening, but of course, I'm not exactly an expert sociologist of totalitarianism. Which does leave us the intuition that such events would require some kind of totalitarian seizure of power.

comment by Izeinwinter · 2014-11-17T04:22:08.719Z · score: -3 (9 votes) · LW · GW

Classical economics are just wrong. Because they have, and continue to, fail empirical testing. All economic theories do, which implies that we have no actually correct theories of economics, and are just wandering in the wilds of error.

Keynes is.. less wrong.. than the rest, but doesn't get applied very effectively or often in the real world because his recommendations have a strong tendency to step on the toes of the politically connected. My personal intuition is that Georgist economics are even more correct, but there is a dire shortage of real world testing for that because Georgism is even more offensive unto the people who buy politicians than Keynes. Same goes for some of the more interesting monetary theories. Banning fractional reserve banking and managing the size of the monetary economy directly via the printing press and taxation looks far more sensible and effective than what we are currently doing but would require bankers and the holders of government bonds to find ways to actually earn money rather than just collect interest.

Which leads to the observation that unemployment is useful to some people. The reserve army of labor is a political and social lever that elevates the status, income and power of employers and rentiers over labor. So as a matter of political economy, if unemployment can be maintained without causing disruptive protest... Not that I think anyone actually sits down and works out how to create unemployment, but actually doing anything about it is a much lower policy priority than preventing even very low levels of inflation for.. not very mysterious reasons.