He criticized my moonshot essay in which I attacked neoclassical economics. I appreciate that he took the time to read it and consider it seriously. But I want to reply to two of his points.
1. He writes,
My old professor in general chemistry (Norman Nachtrieb–now deceased) told us that “science is the art of successful approximation.” Ideal gas law is valid as long as intermolecular forces are assumed to be negligible. A step in an engine cycle is adiabatic as long as no appreciable heat escapes into the environment. The words “negligible” and “appreciable” are purposely left vague, and depend on how precise an answer one actually needs in the result.
I do not believe that the neoclassical model of two factors of production is a decent approximation for any purpose. In the essay, I explain why the concept of aggregate labor productivity is not a useful approximation.
The main claim of the neoclassical model is that factors of production are compensated according to their marginal productivity. We do not observe this in practice. The neoclassical model says that all “labor” is compensated identically at the rate w, and all “capital” is compensated identically at the rate r. Instead, we observe heterogenous wage rates and heterogeneous returns on various forms of investment.
The neoclassical model says that the main cause for variation in wage rates should be the amount of capital per worker. To explain the difference in wages between a construction worker in the U.S. and a construction worker in Mexico, you should be able to point to much higher capital per worker in construction in the U.S. But it turns out that very little of this “capital differential” is tangible. A lot of it reflects cultural differences in management and social norms.
Suppose that you wanted to explain why software engineers are paid more at Google than at some other firm. According to neoclassical theory, that must be because their marginal product is higher at Google. But you cannot even begin to measure “marginal product.” They are working on teams that create a joint product. So the neoclassical claim is vacuous in this case–you can neither confirm nor refute it.
2. Jelski writes,
Contrary to Mr. Kling, I think culture changes are on a generational timescale–roughly 30 years.
If this is true, it does not refute my point that cultural change is accelerating. When did cultural change start occurring at a generational timescale? Probably not before the 20th century. Go back several hundred years, and hardly any cultural change took place over the span of a generation.
Suppose we were to look at measures of economic change. I think the economy is becoming more specialized at a faster rate than before.
How many companies broke into the top 100 between 2000 and 2010, and how does that compare with the number that broke in between 1980 and 1990?
How many new occupations were created between 2000 and 2010, and how does that compare with the number created between 1980 and 1990? (note: the BLS may not have been able to track this accurately)
Take the top five occupations in 1980, and calculate the change in the percentage of the labor force engaged in those occupations in 1990. Then take the top five occupations in 2000, and calculate the percentage of the labor force engaged in those occupations in 2010. If change is accelerating, then we should see a much bigger drop in the recent period.
It’s kind of like saying, “We assume air resistance, flow, and turbulence to be negligible in mechanics all the time,” when one is discussing the matter of how a bee flies or how to design an airplane.
“Complicated air effects are not just important, they are the essence of the matter in the context of this analysis, making models that neglect them not just slightly inaccurate in approximation, but always completely off base, and worse than useless to the extent they tempt us to replace a healthy sense of ignorance and humility before irreducible complexity with one of false mastery.”
This metaphor could also apply to the nature of the modern economy. The economy was once more like a car, where simple mechanics are good enough to explain how things work. Now it’s more like a complicated fighter jet, where simple mechanics don’t help much at all, and would lead one astray.
The World Wars Era Economies (maybe “The World Before The Transistor” or “Before Moore’s Law”) were ones in which commodities, transport, energy, and manufacturing were still dominant, and where models of mostly interchangeable labor made more productive when augmented with capital were arguably more defensible. The world 70 years of Moore’s Law later is a place far beyond the “Safe Operating Envelope” of the assumptions upon which those models were based.
Deirdre McCloskey has used the metaphor of “It works pretty good if you hold it at arms length and squint.”
The particular topic was the output losses from monopoly power, and also from industry concentration. Harberger’s Postulate was mentioned–that you multiply a long series of fractions together and at the end of your calculation you have concluded that the output losses from monopoly power are surprisingly small.
This example I am providing above is totally different and backward looking. I agree that there is something wrong with economic theory, but I cannot even do “Greek letter” economics with all the math. Also, most of the people I know personally who think there is something wrong with economic theory don’t have useful suggestions or meaningful critiques–they just don’t like the conclusions of the theory.
Much of the problem has to do with dynamic effects. If Facebook didn’t exist, could we actually imagine it growing so large? But there it is.
For me, it has been helpful to distinguish product which is essentially separate from time, from that which consumers have distinct time and place preferences. The former still seems to work in a Solow framework and traditional model, while the latter suggests altogether different organizational capacity for production:
https://monetaryequivalence.blogspot.com/2018/02/the-productivity-challenge-of-our-time.html
I can’t follow what you are saying in your post. Perhaps an example of “time based product” would help me.
It’s basically the services we prefer to receive from individuals (where possible) that are not so much about technology, as their personal attention. Plus, these two individuals (in some instances teams are possible) are simultaneously in the same geographic location, which gives an experiential element to what both providers and recipients seek. What may be transmitted involves a full range of skill potential, and is different from the intangible labour you’ve noted, when professionals sell their time to firms rather than individuals.
Here’s a healthcare example of what I’d hope that time arbitrage could provide. Since compensated time would exist in relation to itself, this activity would not pose a threat to the prevailing healthcare structure in the U.S. One reason this matters: there’s little public healthcare where it sometimes counts. This year’s flu bug turns out to be more closely related to an adenovirus of which the vaccine is only available to military recruits. Time arbitrage would allow more sustainable means of research, which government can no longer address and today’s private organizational capacity, lacks the incentive to address.
“Chances are, only a fraction of people in the world could do the job that requires your skills.”
I’m a terminal jockey (“systems analyst”). A typical project requires me and my coworkers to learn new technology – including, perhaps a new programming language – and apply that technology to solve a problem or handle a task, and to do that on time and within budget. To do that you have to have the confidence that, even though you have no idea how to do the job at the start of the project, you can figure it out. My “skill” is that I can acquire new skills largely on my own. More and more workers are going to have to be able to do this as change accelerates.
When most (>80%) of what we produce is services rather than physical stuff, then we need to move on from neo-classical economics. Services are produced and consumed simultaneously, often in the direct presence of the consumer. Marketing has already figured this out. Have a look at the traditional 4P’s of marketing versus the 7P’s for Services Marketing.