Sunday, July 26, 2015

Efficiency and Economic Growth

All the talk about Jeb! Bush's call for Americans, who already work the longest hours of anyone in the developed world, to work even longer hours in a time of widespread unemployment made me recall an interview with Conrad Schmidt, who calls on workers to work less. Schmidt is the founder of the Work Less Party and author of Workers of the World, Relax. This is an interview on Tangentially Speaking with Christopher Ryan from a few years back. In this part of the interview, Schmidt talks about some things that economists fail to acknowledge about how the capitalist economy is designed to work.
Conrad Schmidt: "Growth is a consequence of efficiency. That's the driving impetus behind growth."

Chris Ryan: "So it's productivity driving growth."

Conrad Schmidt: "Efficiency. If you make something more efficient...Let me give you an example. If you make something more labor efficient, which is pretty much all efficiency, you land in the situation where you have a mandate on the economy. Either you consume more, or you have a recession. And it happens throughout history. Let me give you a few examples. James Hargreaves 1784... comes up with this marvelous new fantastic invention. This invention is the Spinning Jenny. What it does is, it spins yarn 4, 5, 6 times faster than a human being can spin it. And you'd think that this would be something great. But what was the consequence? Well, a lot of yarn spinners lost their jobs. And that was the beginning of the Industrial Revolution.

And it did cause quite a stir. It changed the social fabric. Eventually all the yarn spinners, well, they protested, they smashed James Hargreaves' machines, and the British government passes a law that if you harm a machine then you get the death sentence. It was at the point where you have the Luddites versus the entire British army. They were determined to smash machines; this was not a small little uprising. It was quite impressive.

But what eventually got England out of its little recession was wild, extravagant consumerist ideas such as changing your underwear weekly. And eventually people started to consume more. You see that' the impetus of growth--efficiency. If you make something more efficient, it means that you now have to consume more or you end up in a recession. That's the driving impetus of growth itself.
We'll jump up a little bit further in time--the Great Depression. Henry Ford comes up with this amazing idea. He didn't invent the production line, he invented the electrification of the production line. And in just 2-3 years, he could produce twice as many cars. And then it just doubled and doubled. With less and less labor--he was getting rid of employees as his output was doubling. And what he says to the rest of American industry is, 'Look at me, we can all do this! Electrify your assembly process.' Ka-chunk, ka-chunk, ka-chunk, machines come along making anything you can imagine. The consequence was that you now had fewer people required to make the same amount of goods. And you ended up with the Depression because people weren't consuming enough of what they were able to produce. He invented mass production, but he did not invent mass consumption.

[Ryan argues that the factors in the financial sector -speculation and leveraging in the stock market were the main cause the Depression.]

Conrad Schmidt: Oddly enough, these are modern theories to explain the Great Depression. At the time that was the explanation. Later on economists said, 'Oh no, it has nothing to do with efficiency; efficiency you just consume more.' But you see there were several things happening...

Ryan asks about foreign markets. What about selling cars to Europeans? You don't really need the Americans to buy more and more if you can sell your surplus to foreigners.

I'll interject here and say Ryan's idea is exactly what has kept capitalism going over the last thirty or so years - dumping the overproduction on the entire world. But you couldn't do that in 1930. You didn't have the equipment, transportation technology and logistics to transport large goods like cars all over the world. All that changed during World War Two when the need to ship jeeps and tanks and armies and food all over the world led to the invention of the pallet, the shipping container, and large-scale cargo ships, as well as the rebuilding of ports large enough to handle them, along with the use of oil-based transport, and the logistical infrastructure. See this: Pallets, the Single Most Important Object in the Global Economy (Slate).

Add to the fact that people in Europe could just buy cars from European automakers. In the aftermath of World War Two, you had the logistics to ship goods all over the world, and you had the U.S. as the only major industrial power whose manufacturing capacity wasn't curtailed or destroyed. Thus you have thirty years of the golden age of America - widespread wealth and prosperity. By the 1970's, the major industrial powers like Germany and Japan had rebuilt, and their plants and production processes were newer and more efficient to boot. Thus you had widespread competition again, and you get the post-Keynsian crises of the 1970's (exacerbated by oil shocks). The result ever since has been to crush labor, eliminate trade barriers, and industrialize poorer nations as a source of labor and consumption (Neoliberalism). Back to the interview.

Conrad Schmidt: Mass consumption takes a little bit longer to invent. You see, they invented mass production, and back in those days, our grandparents and great grandparents, they were quite the frugal bunch. They really were. A chest of drawers was [unintelligible], and they fixed things. Most people lived in small spaces where they couldn't have more stuff. They saved things rather than spent things. And also, believe it or not, the cities were quite congested with cars at that time, and many people didn't even need them because they had the interurbans. All the cities had the interurbans. So you get anywhere faster than if you had a car.

Another important thing is that salaries and wages weren't increasing as fast as production. Yes you could produce all this stuff, but they weren't paying the employees enough to be able to afford them. So there were two things. One, they didn't have the cash, and two, they didn't need it! So that's the fundamental basic. Yes, everything came down like a house of cards. And each time the house of cards will fall down if the fundamentals are flawed.

Even now, the real fundamental that's slowing down the world economy is the internet. You see, the internet makes things incredibly efficient. Superefficient. You now no longer have to build a big department store and stuff it with goodies. Basically, you just go on your computer, order comes from a warehouse somewhere, you don't have any salespeople, you don't need any charming assistants. Banking, you don't have to go in line, you just, tap, tap, tap. That means we can do so much more with less labor. The consequence is you now have to grow the economy. The efficiency puts both the mandate and the ability. The ability is that you now have so many unemployed people looking for jobs, that's the ability. But the mandate is if you don't, you are in a very volatile situation, politically, because unemployed people, as you know...during the Great Depression the communist party was getting something like seven percent of the vote. Things get very turbulent. See its the efficiency that puts the mandate to create growth.

And what were facing at the moment in the environmental movement is a lot of the things that they're are that we need to make things more efficient. But it doesn't work that way. Let me give you an example.

The primary fuel source, not that long ago, used to be wood. Wood! Chop down a forest and then you've got your fuel. Along comes coal, which based on a definition of green, is twice as efficient as wood. Same mass, twice the amount of energy, and you don't have to chop down your forests. Consequence, does the ecological footprint decrease? No it grows, because you have the Industrial Revolution. You have more efficiency. You can grow the economy. Petroleum. Twice as efficient as coal and also less sulfur, less mercury in the air. Easily transportable. Our definition of green. Each one of these fuel sources should have been an environmental miracle, Now we have an environmental movement saying we need more efficient cars, we need more efficient buildings, we need more efficient airplanes...And the consequence will be what it always been. The efficiency puts both the mandate and the ability of growth, and it's the growth that destroys the ecology.

[...]

Conrad Schmidt: The Jeavons Paradox can be looked at from both a macro and micro perspective. Suppose you make a plane that uses half the amount of energy. That energy saving is fuel, fuel that has to be drilled, you have to get machines - there's a whole industry of people who have jobs supplying the fuel for that airplane. You now make the airplane more efficient, that means there are less jobs supplying that industry. So you've now created a situation where you have to grow the economy to replace those jobs and that's the issue is that you've created both the impetus and the ability for growth.

Chris Ryan: Now this presupposes stable or increasing population. If we have decreasing population than that loss of jobs isn't as much of an issue, right? Because you have fewer people looking for jobs.

Conrad Schmidt: From an ecological perspective there's two concepts. One is each individual, how much they consume, and the other one is how many people there are consuming.... Any efficiency anywhere in the system and you'll end up with increased consumption. The biggest example is a bicycle versus an SUV. Which is better for the environment? Well, I've just given you an example of where I switched from an SUV to a bicycle but it didn't decrease my ecological footprint.

Chris Ryan: But it could have. If you took that surplus money and put it in the bank.

Conrad Schmidt: Bank, the worst! Because they lend it out four times. Even if they're a bank that says they're green, they ain't green, I can promise you that.

Chris Ryan: ...What do they do with their surplus money that's actually good for the environment?

Conrad Schmidt: Well, there's one thing they can do with their surplus money and that is tear it up...The problem is very very simple you to solve. One is, you take that efficiency gain in the economy, and you reduce the hours of labor by whatever amount. There are a lot of countries that have a reduced workweek. Norway, Denmark, Germany--so many countries have a reduced workweek. And this was Keynesian idea. Keynes was the one who said, 'The efficiencies that you have in the system, you gotta do something with them, you can't just grow forever,' and he was the one who started saying, 'Reduce the workweek.'

Another thing you can do is counterbalance the efficiencies with labor-intensive activities that I'd say are inefficiencies. Anything that's labor, you increase the labor cost in certain areas. One way you can do it is organic farming...another one you can do, more teachers for a set number of students...you're putting it into the quality of life aspect; you're increasing the quality of life.

Chris Ryan: But where does the money come from to supply these extra teachers?

Conrad Schmidt: Where does the money come form? It's more of an issue of where does the money go. If we have what we are currently doing, is a free trade, complete capitalist, whichever country is the most competitive, that has the strategic advantage. If, say you have a country that says, 'You know what we'll just pay everybody 2-3 dollars and hour, were not going to put any environmental restrictions,' that county is where all the money goes, where all the jobs go. And the countries that have this exodus of cash, they are in a financially strapped situation, because they can't really compete, they can't produce the same goods because they get produced elsewhere. In a free trade situation you can't afford anything expect to be as competitive and ruthless as possible.

If we now start putting in restriction and countries that exploit labor or countries that have lax environmental standards higher import duties, you now have a situation where the economy can reflect more of our personal values and quality of life because we're not struggling and we're not competing with the most unethical countries in the world. But if were going to be in a competition with other countries that don't have any type of background in environmental and social justice, well, we're just really following suit.

Chris Ryan: Right, its a race to the bottom. They discuss the near-slave conditions in third-world maquiladores. Schmidt describes where the maquiladores come from.

Conrad Schmidt: One of the inventions that Henry Ford comes up with is the mass produced tractor. Amazing! You could not have one farmer, he could farm multiple farms, he didn't need employees...and millions lost their jobs in agriculture and they went to the cities. So Roosevelt says, how do I solve this problem, because people are unemployed. One of the things Roosevelt did, and it is really quite incredible, he increased the price of food. And this is during a Great Depression! They way he did it is he put restrictions on farm size so that you wouldn't get as much benefit from mechanization. And this in many ways preserved the rural identity of the United States for many, many years.

So 1973 comes, and Nixon hires a new guy on the job, the Secretary of Agriculture, his name was Earl Butz. And he says, 'You know what, this is silly. What were going to do is were going to get rid of all these restrictions, and were going to make agriculture as efficient as possible.' So the farms got bought up, and the mechanization with gigantic monster machines, and millions lost their jobs again, and their homes. But now there's an interesting problem because the United States was doubling and tripling their food production. What were they going to do with all this food?

So what they did was they dumped the food on third world countries like Mexico. Like, you could not make corn faster than the U.S. could bring it to you. As the American rural society collapsed, so did rural communities around the world that didn't have the strength to say no to the United States....And so all these people moved to the maquiladores where they all make Nikes and the rest of it.

If we want to solve our social problems and our environmental problems, we have to go the opposite and make things more labor intensive, or another way, makes things more inefficient. It sounds crazy.

Ryan says that for him it always comes down to population levels.  He points out that agriculture is the first efficiency.

Conrad Schmidt: When you look at countries that have the longest hours of work, you also have countries with the biggest discrepancy between the rich and the poor. You have the biggest divide. You see, in countries where people are working the longest hours, they're not forming communities, they're not finding out whats going on, they have less time to hold politicians and corporations accountable. Democracy is weakened. And in countries where you have shorter hours of work, Denmark Norway Germany, lots of these countries where people have more time to be involved in social democracy, wages are higher and you have a more egalitarian society.

Chris Ryan: Interesting that those are often considered  the most efficient societies. German efficiency, Danish efficiency...

Conrad Schmidt: Oh, they're efficient, but they turn their efficiency into a reduction of hours. Norway it's two months less than here in North America. And as soon as I say Norway, somebody says, 'Oh but that's because they have all the oil and gas reserves.' And I say no, it's the other way around. You see, in Norway they had a populace that said, 'No were not privatizing these resources. They belong to us as a society.' They had the community structure to demand it. In other countries, in Canada, I mean the oil reserves, the land, the rest of it, it's been privatized. And people have to work longer hours and they're becoming poorer. Incomes in North America are declining. In other places where people have less hours of work, their incomes are increasing.
Tangentially Speaking 76: Conrad Schmidt (Work Less Party)

There is more here to discuss than one blog post will fit, so just a few brief notes:

1.) What I find most interesting is that this contrarian view of economics proposes the exact mirror-image opposite of what the economics priesthood prescribes as a matter of absolute dogma - less efficiency, less work, decreasing population, more trade barriers. It could be said that the entire economics profession is in place to keep us from even considering these proposals, and disguising that in the veneer as a "science."

2.) What Schmidt describes as "mass consumption," economists call "rising living standards." Most of us like changing our underwear more than once a week. So there is a built-in bias to see increased consumption as a good thing, and hence efficiency as an unalloyed good in every instance, and Schmidt doesn't really deal with this. I would argue that capitalism's built-in incentives drive overproduction and gluts in some areas, artificial scarcity in others, all while impoverishing the common social purpose and undermining social harmony.

3.) Not mentioned is that a major driver of the need for the growth is the need to pay back the interest on existing loans. That is, our financial system also imposes a built-in mandate for growth. I'm sure he's aware of this, but it's only an hour interview and can only cover so much.

As for population growth, it's often said by detractors that Social Security is a Ponzi Scheme. But you can read articles about how every industrialized country on earth is concerned about stable populations, because how are we going to pay for retirees without more workers? What this concern acknowledges is that all of capitalism is a Ponzi scheme - it constantly needs more people to buy in at the bottom of the pyramid to work - the very definition of Ponzi.

4.) Getting more efficient doesn't make more sense unless you have someplace to absorb the extra labor. This is the modern problem. It assumes that work is always unlimited. that gives me an opportunity to post this: Sandwichman's Lump-of-Labor Odyssey (Econospeak). The writer of the site, who for some reason is called Sandwichman (not to be confused with Slenderman), looks at the history of that idea and finds that there really is no justification for it. It was originally used to argue that there was no fixed amount of trade, and the idea somehow got applied to work, but there has never been any empirical justification or comprehensive refutation of the idea, just rhetoric.

I always hear about Greece's bloated and inefficient public sector. That is, there's a lot of inefficiencies and employees that don't need to be there. So you shrink the government and loose the dead weight, and those workers go...where exactly? Certainly not the private sector - there aren't enough jobs there right now. So now people who at least got a paycheck in cushy government makework job now get no paycheck and all, and this is better how? And as for the thinking that bloated government and subsequent high taxes are the cause of private sector stagnation - well, austerity has gutted the private sector far beyond anything government has ever done.

5.) Historically, the Malthus-Ricardo model predicts that increased efficiency leads to higher living standards which translates into higher population growth, which end up destroying the increases in living standards (and ultimately becoming worse off, since you burn through your irreplaceable natural resources faster). This is what happened until the Industrial Revolution. As Ryan pointed out, agriculture is a lot more "efficient," than hunting-foraging, but the population increases made people worse off in the long run.
Here is how Malthus-Ricardo works. In any society at any time there is a reasonably well defined notion of "subsistence," a level of income, essentially wages, just adequate to support a standard of living that will lead the average family to reproduce itself. Subsistence has a hard physiological basis in calories, necessary nutrients, protection from weather, and the like, but it can be modified by cultural factors, social norms, and customs. If wages happen to exceed subsistence for a while, because of good harvests or a reduction in the supply of labor through war or disease, normal mortality will decrease, fertility may rise, and the population will increase. But not for long: the pressure of a larger working population on a fixed supply of land and resources will force labor productivity and wages to fall. (That is the famous law of diminishing returns: the idea is that as more and more workers are squeezed onto the same area of land, at some point each additional worker will be able to add less output than his predecessor did, simply because he has a smaller share of the land to work with.)

This process cannot stop until wages are back to the subsistence level. The population will be bigger, but its members no better off than they were. If harvests then go back to normal, productivity and wages will fall below subsistence and the process just described will go into reverse: higher mortality will cause population to fall until productivity and wages return to the subsistence level and then stabilize.

This is a simple and powerful story, and it has just the implications needed to explain the grim preindustrial history. The key implication is that the material standard of living of any population is determined only by the level of subsistence. Incremental technological progress, which certainly took place in England -- and elsewhere -- between 1200 and 1780, does not seriously improve living standards; it just allows a larger population to be supported.... Even more paradoxically, progress in health care and sanitation may mean that the subsistence wage falls, because now mortality can be contained with even less in the way of nutrition, clothing, and shelter. In principle, then, medical progress could lead to lower wages and poorer conditions of life in those other respects. This Malthus-Ricardo trap can certainly account for the long failure of living standards to rise...
'Survival of the Richest'? A review by Robert M. Solow (NY Review of Books)

Economists generally assume that this model is no longer valid, and there is some sort of "special" efficiency gains that happened during the Industrial Revolution which means that the Malthusian equilibrium is gone forever. That is, we innovate just so fast nowadays that we never have to worry again and we can just keep on growing population and resource usage forever.

But we know that is was the cumulative, compounding effects of innovation combined with the use of fossil fuels - weeks of labor in a single barrel of oil - and the plundering of non-state societies that got us here. Then, after the fact, the idea that "institutions" were the driving force behind  economic growth was developed into economic dogma, and along with that came  a series of assumptions.

What were those assumptions? That population growth is good, that innovation is unlimited, that resources are infinite, that governments should be restrained, that taxes on wealth should be low, that supply creates its own demand, that individual wealth accumulation and unbridled competition are the driving factors of growth, and that greed and selfishness are the primary motivations behind human action. Acknowledgment of the role of oil would render useless the political aspects of economic project, which is the important part.

1 comment:

  1. Man, awesome read. Lots of great ideas to ponder.

    I think a lot of folks are kicking around, waiting for our current system to fall apart. Maybe some of these ideas will survive for the next go-round. For now it seems the bastards have won this round (techno-industrial civilization).

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