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the_affluent_society [2010/06/01 22:48]
dan
the_affluent_society [2011/12/14 12:00] (current)
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 This disinterest in the essential drivers of growth may be justified by our underlying indifference to our level of production. ​ We have proven in wartime that when production is of extreme importance to it, we attend to all means by which it can be improved rationally. ​ Perhaps in peacetime, the commitment to raising production substantially simply isn't worth the effort. ​ And yet even if that is so, the limited extent to which we do selectively try to raise output is steeped in tradition and irrationality. This disinterest in the essential drivers of growth may be justified by our underlying indifference to our level of production. ​ We have proven in wartime that when production is of extreme importance to it, we attend to all means by which it can be improved rationally. ​ Perhaps in peacetime, the commitment to raising production substantially simply isn't worth the effort. ​ And yet even if that is so, the limited extent to which we do selectively try to raise output is steeped in tradition and irrationality.
  
-Another irrationality persists (more in America than elsewhere?​):​ the prestigious usefulness of private-sector output, compared to the burdensome annoyance of public expenditure. ​ Somehow public expenditure can never quite be viewed as a productive and enriching element of national output; it is forever something to be avoided, at best a necessary encumbrance. ​ Cars are important, roads are not.  An expansion in telephone services improves the general well-being, cuts in postal services are a necessary economy. ​ Vacuum cleaners to ensure clean houses ​boast our standard of living, street cleaners are an unfortunate expense. ​ Thus we end up with clean houses and filthy streets.+Another irrationality persists (more in America than elsewhere?​):​ the prestigious usefulness of private-sector output, compared to the burdensome annoyance of public expenditure. ​ Somehow public expenditure can never quite be viewed as a productive and enriching element of national output; it is forever something to be avoided, at best a necessary encumbrance. ​ Cars are important, roads are not.  An expansion in telephone services improves the general well-being, cuts in postal services are a necessary economy. ​ Vacuum cleaners to ensure clean houses ​boost our standard of living, street cleaners are an unfortunate expense. ​ Thus we end up with clean houses and filthy streets.
  
 Production has taken on a preeminent role in our lives, despite being a goal we fail to pursue vigorously or thoughtfully. ​ It is a measure of achievement,​ though we do not strive particularly hard to achieve. ​ This is not a call to take the problems of production more seriously. ​ It may instead be simply an observation that production isn't important to us.  Perhaps we value maximal production primarily for the security that affords us --- by maximising production we ensure full employment. ​ Advertising convinces us of the absolute necessity of consuming the goods that we already produce, but not of the need to produce anything currently beyond our means. Production has taken on a preeminent role in our lives, despite being a goal we fail to pursue vigorously or thoughtfully. ​ It is a measure of achievement,​ though we do not strive particularly hard to achieve. ​ This is not a call to take the problems of production more seriously. ​ It may instead be simply an observation that production isn't important to us.  Perhaps we value maximal production primarily for the security that affords us --- by maximising production we ensure full employment. ​ Advertising convinces us of the absolute necessity of consuming the goods that we already produce, but not of the need to produce anything currently beyond our means.
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 The fightback comes in two stages. ​ Firstly, and rather weakly, it is suggested that this only applies to an individual good --- that agents have an insatiable desire for variety and that an individual can continue to consume new products as his income rises which maintain a constant marginal utility of consumption. ​ Secondly, and not entirely compatibly, the question is proclaimed to be untestable and therefore unscientific. ​ Intertemporal comparisons are held to be inherently illegitimate. ​ Thus if a worker'​s wage rose from $10 to $20 last year, the benefit to him of that extra $10 of consumption cannot be compared with this year's raise from $20 to $30, simply because they occurred at different times. ​ It is a common mistake of the uninitiated student of economics to suppose that intertemporal comparisons of this type might be valid, and one which the teacher of economics expends some effort in correcting. The fightback comes in two stages. ​ Firstly, and rather weakly, it is suggested that this only applies to an individual good --- that agents have an insatiable desire for variety and that an individual can continue to consume new products as his income rises which maintain a constant marginal utility of consumption. ​ Secondly, and not entirely compatibly, the question is proclaimed to be untestable and therefore unscientific. ​ Intertemporal comparisons are held to be inherently illegitimate. ​ Thus if a worker'​s wage rose from $10 to $20 last year, the benefit to him of that extra $10 of consumption cannot be compared with this year's raise from $20 to $30, simply because they occurred at different times. ​ It is a common mistake of the uninitiated student of economics to suppose that intertemporal comparisons of this type might be valid, and one which the teacher of economics expends some effort in correcting.
  
-Only rather ​wayward voices such as Keynes dare to challenge such assumptions. ​ According to Keynes, the needs of human beings+Only wayward voices such as Keynes dare to challenge such assumptions. ​ According to him, the needs of human beings
  
 > fall into two classes --- those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings might be, and those which are relative only in that their satisfaction lifts us above, makes us feel superior to, our fellows. > fall into two classes --- those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings might be, and those which are relative only in that their satisfaction lifts us above, makes us feel superior to, our fellows.
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 Moreover, Moreover,
  
-> assuming no important wars and no important increase in population, the economic problem may be solved, or at least within sight of solution, within a hundred years. ​ This means that the economic problem is not --- if we look into the future --- the permanent problem of the human race.((John Maynard Keynes, 1931, Essays in Persuasion, "​Economic Prospects for Our Grandchildren",​ London: McMillan, pp365-6. ​ Italics in the original.))+> assuming no important wars and no important increase in population, the //economic problem// may be solved, or be at least within sight of solution, within a hundred years. ​ This means that the economic problem is not --- if we look into the future --- //the permanent problem of the human race//.((John Maynard Keynes, 1931, Essays in Persuasion, "​Economic Prospects for Our Grandchildren",​ London: McMillan, pp365-6. ​ Italics in the original.))
  
 Needless to say, this distinction between some class of needs which are inherently satiable and some other, possibly more nebulous class is still regarded as a profoundly heretical suggestion by the conventional wisdom. Needless to say, this distinction between some class of needs which are inherently satiable and some other, possibly more nebulous class is still regarded as a profoundly heretical suggestion by the conventional wisdom.
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 Production for the sake of security is important. ​ Production for the sake of production is not.  Consider the following hypothetical:​ a presidential candidate has to choose between (a) a substantial nationwide productivity increase that was split equally between step output growth and increased unemployment,​ and (b) no increase in productivity:​ every candidate would choose (b). Production for the sake of security is important. ​ Production for the sake of production is not.  Consider the following hypothetical:​ a presidential candidate has to choose between (a) a substantial nationwide productivity increase that was split equally between step output growth and increased unemployment,​ and (b) no increase in productivity:​ every candidate would choose (b).
  
-Spiralling debt creation for consumption is an important part of the contemporary process of want creation. ​ Emulation and advertisement create wants in those with and without the means to pay alike. ​ Consumer debt in America has been rising rapidly since the War, substantially above rises in earnings. ​ Significant numbers of the poorly paid are committed to repaying over a fifth of their income in debt repayment (one in nine households in a low income bracket(($2000-$3000 per annum in 1955; cf median income of $3960 (p168).)) is committed to paying more than 40 per cent). ​ Consumer debt is macroeconomically destabilising --- people borrow and spend when the economy is healthy and cut expenditure in order to repay debt when the economy is weak.  The consequences of unemployment in a household that has precommitted over 40 per cent of its pre-tax income to debt repayment are severe, for the household but also for the economy more generally. ​ This continual expansion in debt appears to be necessary for consumer demand to keep pace with rising output, but the debt cannot continue to expand indefinitely --- there are practical limits to the extent to which consumers can sink into debt.  If the ability of advertising to keep demand abreast of production falters, the consequences could be dangerous, and could be significantly magnified by a consequential debt crisis. ​ The conventional wisdom regards the nation'​s spiralling consumer debt as benign. ​ Unlike in the UK, there is no suggestion that it might be curtailed by legislators. ​ At the same time, government borrowing for investment in public infrastructure is tightly controlled.+Spiralling debt creation for consumption is an important part of the contemporary process of want creation. ​ Emulation and advertisement create wants in those with and without the means to pay alike. ​ Consumer debt in America has been rising rapidly since the War, substantially above rises in earnings. ​ Significant numbers of the poorly paid are committed to repaying over a fifth of their income in debt repayment (one in nine households in a low income bracket(($2000--$3000 per annum in 1955; cf median income of $3960 (p168).)) is committed to paying more than 40 per cent). ​ Consumer debt is macroeconomically destabilising --- people borrow and spend when the economy is healthy and cut expenditure in order to repay debt when the economy is weak.  The consequences of unemployment in a household that has precommitted over 40 per cent of its pre-tax income to debt repayment are severe, for the household but also for the economy more generally. ​ This continual expansion in debt appears to be necessary for consumer demand to keep pace with rising output, but the debt cannot continue to expand indefinitely --- there are practical limits to the extent to which consumers can sink into debt.  If the ability of advertising to keep demand abreast of production falters, the consequences could be dangerous, and could be significantly magnified by a consequential debt crisis. ​ The conventional wisdom regards the nation'​s spiralling consumer debt as benign. ​ Unlike in the UK, there is no suggestion that it might be curtailed by legislators. ​ At the same time, government borrowing for investment in public infrastructure is tightly controlled.
  
  
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 Monetarism does not act directly on the wage-price spiral. ​ It acts only by controlling business borrowing for investment. ​ This is often poorly understood. ​ It is not unknown for conservatives to simultaneously call for a rising rate of business investment (and tax incentives to achieve this) alongside tight monetary policy to control inflation. ​ The combination of the two policies is absurd. ​ The myth seems to persist that monetary policy somehow acts directly on prices, the wage price spiral, without touching the volume of producer borrowing, investment and spending. Monetarism does not act directly on the wage-price spiral. ​ It acts only by controlling business borrowing for investment. ​ This is often poorly understood. ​ It is not unknown for conservatives to simultaneously call for a rising rate of business investment (and tax incentives to achieve this) alongside tight monetary policy to control inflation. ​ The combination of the two policies is absurd. ​ The myth seems to persist that monetary policy somehow acts directly on prices, the wage price spiral, without touching the volume of producer borrowing, investment and spending.
  
-Monetary policy has a differential impact on different types of business. ​ The circumstances under which monetary control is attempted are those of strong consumer demand. ​ Under such conditions, firms in oligopolistic markets tend to have unliquidated gains. ​ This enables them to pass on the increased cost of borrowing, and this will be especially easy when new borrowing is undertaken for the supposedly laudable goal of investment. ​ Unions and the public understand and accept this motivation for price increases without concomitant wage increases. ​ These firms' capacity to pass on increase ​costs also make them a safe bet for banks choosing to ration credit (as normally happens under tight monetary conditions). ​ In contrast, those in competitive markets cannot raise prices to meet these costs. ​ They are less likely to secure rationed credit. ​ They cannot resort to bond issues to circumvent rationing. ​ Monetary policy acts primarily on small firms and, for this reason, tends to find approval in larger firms. ​ Severe monetary policy tends therefore to be forcefully resisted by small businesses and farmers.+Monetary policy has a differential impact on different types of business. ​ The circumstances under which monetary control is attempted are those of strong consumer demand. ​ Under such conditions, firms in oligopolistic markets tend to have unliquidated gains. ​ This enables them to pass on the increased cost of borrowing, and this will be especially easy when new borrowing is undertaken for the supposedly laudable goal of investment. ​ Unions and the public understand and accept this motivation for price increases without concomitant wage increases. ​ These firms' capacity to pass on increased ​costs also make them a safe bet for banks choosing to ration credit (as normally happens under tight monetary conditions). ​ In contrast, those in competitive markets cannot raise prices to meet these costs. ​ They are less likely to secure rationed credit. ​ They cannot resort to bond issues to circumvent rationing. ​ Monetary policy acts primarily on small firms and, for this reason, tends to find approval in larger firms. ​ Severe monetary policy tends therefore to be forcefully resisted by small businesses and farmers.
  
-There is also a potential risk involved. ​ Investment spending is traditionally the most volatile of all demand in the economy. ​ As discussed, monetary policy may well need to be severe in order to begin to bind, and actually become effective in reducing inflation. ​ The effects ​on an extreme contraction in the money supply on a notably volatile section of demand are unavoidably unpredictable. ​ The economy cannot be '​fine-tuned'​ in this way.  Monetary contraction may be completely ineffective up to a point, and then disastrously over-effective. ​ There is no way of knowing.+There is also a potential risk involved. ​ Investment spending is traditionally the most volatile of all demand in the economy. ​ As discussed, monetary policy may well need to be severe in order to begin to bind, and actually become effective in reducing inflation. ​ The effects ​of an extreme contraction in the money supply on a notably volatile section of demand are unavoidably unpredictable. ​ The economy cannot be '​fine-tuned'​ in this way.  Monetary contraction may be completely ineffective up to a point, and then disastrously over-effective. ​ There is no way of knowing.
  
-Monetarism is not an effective tool.  It is blunt, unreliable, discriminatory and dangerous. ​ These lessons have recently been relearned (1968-69) as monetary policy has attempted ​to constrain inflation resulting from Vietnam spending.+Monetarism is not an effective tool.  It is blunt, unreliable, discriminatory and dangerous. ​ These lessons have recently been relearned (1968--69) as monetary policy has been used to attempt ​to constrain inflation resulting from Vietnam spending.
  
 ====== Production versus Price Stability ====== ====== Production versus Price Stability ======
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 In the US, public expenditure tends to hover at the lower end of that tolerable by the community. ​ There is little or no room for it to be cut (whilst it is often inefficiently administered,​ cutting budgets is a terrible way of reducing inefficiency:​ "it is far easier to cut function than waste"​). ​ Significant cuts in public spending are politically very difficult. In the US, public expenditure tends to hover at the lower end of that tolerable by the community. ​ There is little or no room for it to be cut (whilst it is often inefficiently administered,​ cutting budgets is a terrible way of reducing inefficiency:​ "it is far easier to cut function than waste"​). ​ Significant cuts in public spending are politically very difficult.
  
-Tax increases in the midst of inflation, which themselves directly increase prices and business costs, appear rather obtuse to the layman. ​ More importantly,​ the suggestion of tax increases ​seem to threaten the tacit agreement that the issue of economic redistribution be ignored. ​ When tax increases are proposed, liberals feel a knee-jerk responsibility to call for them to be progressive and conservatives feel a knee-jerk suspicion that the real goal is to expropriate their wealth for the benefit of others. ​ Finally, there is the ubiquitous conflict with production and employment --- whilst some monetarists hope to argue that monetarism can control inflation through some unseen mechanism that does not reduce production, that claim is never made of fiscal control.+Tax increases in the midst of inflation, which themselves directly increase prices and business costs, appear rather obtuse to the layman. ​ More importantly,​ the suggestion of tax increases ​seems to threaten the tacit agreement that the issue of economic redistribution be ignored. ​ When tax increases are proposed, liberals feel a knee-jerk responsibility to call for them to be progressive and conservatives feel a knee-jerk suspicion that the real goal is to expropriate their wealth for the benefit of others. ​ Finally, there is the ubiquitous conflict with production and employment --- whilst some monetarists hope to argue that monetarism can control inflation through some unseen mechanism that does not reduce production, that claim is never made of fiscal control.
  
-The final possibility is to combine wage and price controls with a background fiscal policy. ​ Price controls need only be effective in oligopolistic markets, in which they are much easier to implement anyway --- in competitive markets there is no union or corporate power to fuel the wage-price-profit spiral. ​ But such controls would be in stark contrast to all conventional wisdom. ​ By controlling prices, the allocative efficiency of the market is impaired --- prices cannot adjust to changing circumstances to redistribute resources. ​ During wartime such allocative efficiency was swamped by far greater increases in output ​along far more effective ​dimensions ​than improved allocation --- those typically receiving less attention from economists.+The final possibility is to combine wage and price controls with a background fiscal policy. ​ Price controls need only be effective in oligopolistic markets, in which they are much easier to implement anyway --- in competitive markets there is no union or corporate power to fuel the wage-price-profit spiral. ​ But such controls would be in stark contrast to all conventional wisdom. ​ By controlling prices, the allocative efficiency of the market is impaired --- prices cannot adjust to changing circumstances to redistribute resources. ​ During wartime such allocative efficiency was swamped by much greater increases in output ​by far more effective ​means than improved allocation --- those typically receiving less attention from economists.
  
-Modern expectations that the economy will be held very near full employment have opened the way for persistent inflation. ​ The conservative (monetarist) response is ineffectual,​ discriminatory and potentially dangerous. ​ The liberal (fiscal) response is so at odds with the goals of high output and employment that it is politically ​unfeasible.  The only remaining alternative (price controls) labours under a large ideological cloud. ​  The way is open for recurrent inflation, which itself has a discriminatory impact on different groups, and exacerbates the other unsolved problem of the affluent society.+Modern expectations that the economy will be held very near full employment have opened the way for persistent inflation. ​ The conservative (monetarist) response is ineffectual,​ discriminatory and potentially dangerous. ​ The liberal (fiscal) response is so at odds with the goals of high output and employment that it is not politically ​feasible.  The only remaining alternative (price controls) labours under a large ideological cloud. ​  The way is open for recurrent inflation, which itself has a discriminatory impact on different groups, and exacerbates the other unsolved problem of the affluent society.
  
 ====== The Theory of Social Balance ====== ====== The Theory of Social Balance ======
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 In American society, production is seen as the primary social goal.  This is due to the continuing thrall of anachronistic ideas, vested interests in production, the obscurantism of the theory of consumer needs, a mistaken conception of the national security and an unfortunate association under present conditions between production and security for many millions of workers. In American society, production is seen as the primary social goal.  This is due to the continuing thrall of anachronistic ideas, vested interests in production, the obscurantism of the theory of consumer needs, a mistaken conception of the national security and an unfortunate association under present conditions between production and security for many millions of workers.
  
-A society must survive before it may begin to consider the pursuit of happiness its primary goal.  But production is no longer a means to survival, either as it traditionally was, or in its modern reformulation as a war or productive capacity with the Soviet Union. ​ But military production plays an essential role within American society. ​ Many valuable technologies have been developed under military auspices.+A society must survive before it may begin to consider the pursuit of happiness its primary goal.  But production is no longer a means to survival, either as it traditionally was, or in its modern reformulation as a war of productive capacity with the Soviet Union. ​ But military production plays an essential role within American society. ​ Many valuable technologies have been developed under military auspices.
  
 > This has done more to save us from the partial technological stagnation that is inherent in a consumer goods economy than we imagine. ​ But this is a hideously inefficient way of subsidising general scientific and technical development as nearly all scientists agree. ---page 283 > This has done more to save us from the partial technological stagnation that is inherent in a consumer goods economy than we imagine. ​ But this is a hideously inefficient way of subsidising general scientific and technical development as nearly all scientists agree. ---page 283
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