Arnold Kling  

Theory X?

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A new paper by David Levine.

capitalist economies by virtue of being efficient employ longer and more specialized production chains than more poorly organized economies. This raises output, welfare and utility, but it also leads to more "crises" than shorter less efficient production chains in the sense that output is more volatile. One might summarize by saying: capitalist economies are more subject to crises than less efficient economies - and this is a good thing.

...The model of chains also helps understand the consequences of technological change. For example, better communications - the internet - can potentially increase r .This will lead to greater specialization, longer chains, more output, and higher welfare. But it will also result in higher unemployment and greater volatility.

One can see a "production chains" story in the paper by Jonathan Eaton, et al (thanks to Tyler Cowen for the pointer).

The decline in total manufacturing demand (durables and non-durables) accounted for more than 80 percent of the global decline in trade/GDP.

I think that these sorts of papers are much more valuable at the margin than yet another paper that uses rational expectations or dynamic stochastic general equilibrium or price friction. We need more work on theory X and less work on theory Y.

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CATEGORIES: Macroeconomics

COMMENTS (6 to date)
fundamentalist writes:

Theory X is very Austrian in approach. Austrians would call the longer chains more roundabout or capital intensive techniques. More capital intensive techniques can be more unstable because the capital must exist before there is demand for workers. When capital gets destroyed as it does during a boom, workers who depended upon that capital lose their jobs. In less capital intensive countries labor is mostly manual labor and does not require capital, so such problems don't exist, although manual labor receives a much lower wage than skilled, capital-intensive labor.

Still, the question remains "what destroys capital and causes unemployment?" Capital can only be destroyed by poor investment decisions. Those happen all the time and we don't go into a depression. What makes them cluster so that we have had a depression every decade for the past 300 years? The Austrian answer is changes in the money supply by banks which cause artificially low interest rates and excessive investment in capital goods.

Jeremy, Alabama writes:

These "chains" and your patterns of specialization would appear to be strongly related.

Thomas DeMeo writes:

Is any of this really true? Isn't the evidence pretty clear that economic activity is more stable now than in the past?. Can't we see that supply chains perform with far more stability today than they were in the past couple of centuries (or even decades)? Pick almost any example: food, clothing, durable goods, machine parts... All of these could easily become quite scarce in the past, to the point of becoming threatening to human life. When was the last time someone couldn't obtain any of this stuff?

What is true is that we are doing far more. This means that the totality of the risk is greater. We also know that redundancy and separation are the keys to stability, and these steal profit. Finally, we all expect more and tolerate less.

ajb writes:

Isn't this related to the work of North and Wallis arguing that transactions costs become a larger part GDP in modern times because complex transactions are more profitable and easier to sustain in advanced economies? They lower some risks but introduce new ones. After all North Korea because it has little trade is not particularly vulnerable to international macro crises.

Nick Rowe writes:

Hmmm. Sounds wrong to me. But, *at the margin* I think I would agree with you that it's worth somebody working on.

David C writes:

I was thinking along the same lines as Thomas DeMeo. I think the answer implied by David Levine's reasoning is that the Federal Reserve has increased stability despite an economy that should be gradually decreasing in stability. Googling his name came up with an important bit of trivia. He works for the St. Louis branch of the Fed.

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