Arnold Kling  

A Barbershop Quartet Metaphor

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A Disturbing Sentence in a Dis... Woolsey's Counter Rant...

In the comments on what I am hoping will be a classic post (my rant against monetarism), Bill Woolsey insists [and Nick Rowe echoes]


[if] we see lower demands for nearly all goods, low hires everwhere, low vacacancy rates, reduced production of everything, we _must_ have an excess demand for money.

Of course, this...doesn't apply to your world where people want to produce, presumably to earn incomes, but not because there is anything they want to buy.

I think that Woolsey does not get the coordination-failure aspect of what I am talking about. Let me try a metaphor, based loosely on the scene in the movie The Music Man in which Professor Harold Hill discovers that the bickering City Council members are an ideal barbershop quartet.

Suppose that four young people

(a) are unemployed
(b) would buy barbershop quartet recordings
(c) could constitute a barbershop quartet

The problem is that no one has discovered that these four people could be barbershop quartet recording artists. They are not hoarding money (there is no money in this story). They just sit around, living off their parents, because they do not know that they could harmonize with one another. Once they are discovered, they will engage in economic activity that will be counted as GDP. Until then, they are unemployed.

Note that they do not even have to want to buy barbershop quartet recordings. They may want to sell their recordings to others and use the proceeds to buy something else. The reason that they are not working as a barbershop quartet is that they do not know they are a barbershop quartet. (The main problem with this metaphor is that it understates the complexity of the problem. Harmonious economic activity in a modern economy with its abstract and roundabout production methods can require the correct alignment of thousands--perhaps millions--of people.)

Economists tend to posit a world where all production techniques are known, everybody's skills are known, all tastes are given, and the only co-ordination problem is to find a wage and a price vector that will get everybody to choose the optimal pattern of production and consumption. Instead, I want to think about a world in which production techniques, skills, and tastes are constantly evolving and need to be discovered. (There are plenty of heterodox economists who have done thinking about this. Leijonhufvud comes to mind, as do a number of Austrians. It's not that the ideas I am trying to push are original. It's just that they discomfit those who adhere to other theories.)

In this world, the price mechanism is a necessary but not sufficient condition for coordination. Trial and error, search, and adaptation are also needed. Until the adjustments take place, marginal products can be very low. (Note that if health insurance costs more to firms than its value to workers, this wedge, which can be significant, has to be subtracted from the gross marginal product.) Opportunity costs, given that people can live for a while on savings, unemployment benefits, and other sources of support, are not so low. Hence, we observe unemployment.

During the Great Depression, support was harder to obtain, so that opportunity costs were lower. However, marginal products also were very low. Thanks to the Dust Bowl, the marginal product of a farm worker might have been less than what he would need to feed himself. In that case, the problem is the real marginal product, not the money wage. There are people who are employed and who can eat, and there are inframarginal farm owners who can supply food, but the former farm laborers caught in the coordination failure cannot find jobs that will feed themselves.


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CATEGORIES: Macroeconomics




COMMENTS (8 to date)
Lord writes:

But if barbershop quartets were all the rage, selling out, and generating large incomes, those young people might be induced to try forming a group. Until then, though this might be a possibility, it remains just another thing to try, one of many, but all with low probability. Increasing the money supply is just what separates the wheat from the chaff, those opportunities that are really profitable from those that are marginal, and stimulate the willingness to experiment and try in the first place. The question is where are those highly profitable opportunities. If there are none, it is because money is too tight, because even if technology has hit a wall and no appealing opportunities exist, the willingness to experiment and develop such opportunities won't cease.

Allan Webb writes:

Interesting that you would use a barbershop quartet metaphor. Under normal circumstances, quartets don't have the ability to make any significant dollars (certainly not enough for all four members to live on), but do it for their own enjoyment and the occasional paid gig (money which goes towards expenses like uniforms, traveling to contests, etc).

Recently, though, a quartet from the UK was signed to a 1M pound contract by the UK division of Arista Records. This was not something that the quartet had in mind; they were just doing the same things that quartets all over the world do, with no expectation of a big payday. Yet big money suddenly appeared "out of the blue", as it were.

http://www.americanharmonythemovie.com

Two Things writes:

Prof. Kling,

I'm glad you're writing your posts and I hope some of the people you're writing for will "get it."

When I read that Bill Woolsey quote:

[if] we see lower demands for nearly all goods, low hires everwhere, low vacacancy rates, reduced production of everything, we _must_ have an excess demand for money.

I'm no more persuaded than you are. Low demand for goods and services in general stems not from a shortage of money as such, but from prospective buyers' lack of (desirable) goods/services to exchange. For many workers, it's that no one really wants them to do their old jobs (e.g., hang drywall in Scottsdale).

I find it interesting that so many people, even Ph.D. economists, are confused about money. Hardly anyone really wants (fiat) "money," especially not in the crude sense of little slips of colored paper. They want real goods and services. Money is a means, not an end, for most people. Without money we almost couldn't have division of labor so we'd all be much, much poorer, but money is still a tool, a mechanism, not something with intrinsic worth.*

Even when people say they want to "save" money, they generally mean they wish to exchange some of their production/labor today for goods and services in the future. By saving "money" instead of, say, kilos of rice, they merely seek to minimize exchange and storage costs (since they may not even be sure now exactly what they want to consume in the future-- they may know they want to eat but not whether they'll prefer Chinese or Italian cuisine next Friday). When people save (stockpile) money qua money it's not because of money's intrinsic value (zero for fiat money) but for use in exchange.

I'm quite persuaded to your "sustainable patterns" or "recalculation" view: when all sorts of people figure out what other people want and patch together the coordination required to produce it using resources such as currently underemployed labor, then the economy will pick up.

Right now, giving extra fiat money to people who are not doing anything that other people particularly want (e.g., State bureaucrats-- who have actually absorbed much of the Federal "stimulus" spending) just diverts potentially-productive resources into consumption and drives up the (yes, nominal) price of everything.

I think "stimulus" spending (the stimulus we've gotten, not some theoretical apolitical stimulus) has been obviously counter-productive. It has consisted almost entirely of attempts to retard recalculation! "Stimulus" spending has nearly all gone toward propping up failed businesses and business models, keeping negative-productivity bureaucrats on the job, and funding luxuries for cronies (and in the form of extended unemployment assistance, toward minimizing labor mobility**).

Worse yet, the "stimulus" money has been diverted from capital which would otherwise be available to finance myriad attempts to find new "sustainable patterns." The government (by borrowing and by confiscation via dilution (QE/inflation)) has taken away a lot of the capital and products of people who are still working and wasted it on pointless consumption.

The only way the government could have or could yet "stimulate" the economy for real would be to reduce the regulatory burdens by which the government, in the interests of rent-seekers, tries to prevent recalculation. However, I can hardly imagine a viable political path from the government we have, composed of rent-seekers' puppets and more-or-less Marxist authoritarians, to the government we would need. Public-choice theory suggests that water rarely runs uphill.

*Of course commodity money (e.g., gold) can have intrinsic value but the Keynesians are in no position to quibble about that. Anyway, no one can eat gold.

**I'm sympathetic to the plight of the unemployed. We can hardly expect them to fill the new jobs of the future if they starve to death in the present. But we must recognize that UI payments, the way we distribute them now, do have the effect of retarding labor mobility. It's a tough policy question, how to tide people over economic rough spots without paralyzing them too often and making the larger problem too much worse.

Hyena writes:

I have to agree with Lord. That we have labor alignment issues won't change the liquidity issues and, in your post, you note that opportunity costs (that is, really, a liquidity issue) are high. So let's print some money and lower them.

Joseph K writes:

I think it's important to say that excessive demand for money might be a problem during depressions, but Prof. Kling is saying it's not the only problem. There may also be misallocation.

The second thing is that monetary expansion is a poor way to address excessive demand for money. For one, how do we know the demand is really excessive. Perhaps demand for money is just higher than usual because the economy wants to rebuild savings after a long spending and borrowing binge; thus, monetary expansion might keep savings below a sustainable level. It doesn't take into account that people (especially financially savvy people who control a large percentage of the overall savings) may adjust their demand for savings based on expected future inflation; thus, as the money supply expands people just increase their demand for money in response. It doesn't take into account that insufficient demand doesn't effect the whole economy uniformly; thus, monetary expansion can cause excessive demand in segments of the economy that had perfectly adequate demands before. It doesn't take into account harmful effects of inflation, such as the Cantillon effect, namely that different prices will inflate at different rates, and those whose prices rise first will benefit at the expense of those whose price rise later. It doesn't take into the harmful effects of uncertainty – unexpected future inflation makes people more inclined to hold onto savings and avoid risks. Not to mention, as Prof. Kling has said, it ignores that there are probably other things going on in the economy, such as misallocation, which might be exacerbated by monetary expansion because of some of the reasons above.

Joseph K writes:

And I forgot to mention seigniorage. Those that create money will profit from this creation, and they'll do so at the expense of those that hold money.

fundamentalist writes:
Economists tend to posit a world where all production techniques are known, everybody's skills are known, all tastes are given, and the only co-ordination problem is to find a wage and a price vector that will get everybody to choose the optimal pattern of production and consumption.

Exactly! Woolsey says you're wrong because you don't accept those assumptions. At some point mainstream econ needs to question its assumptions and quit arguing as if anyone who disagrees with their stupid assumptions is irrational.

jsalvatier writes:

@fundamentalist

In a word, NO. Non-economists like to think of uncertainty as something mystical that "changes everything". The fact is that economists know how to model uncertainty rather precisely, and adding uncertainty to these models usually changes little of interest.

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