Arnold Kling  

Notes from Perry Mehrling

Welcome to Our Future... The Morality of Fractional Res...

These all come from Understanding Fischer Black, written ten years ago.

From this point of view, economic growth appears as a process of increasing sectoral differentiation and increasing temporal roundaboutness, a process with no apparent end in sight. What we observe as accumulation of capital, physical and human, is just the form that the process takes. The downside of growth by increased specialization is increased vulnerability to technology and taste shocks. "Obsolescence is the dark side of innovation" (1995a, 67).
Mismatch, or "uncertainty about whether we will have what we want in the future, and about whether we will want what we have" (1995a, 45), is also the fundamental source of risk for the economy as a whole. When the match is good, we have a boom. When the match is bad, we have a recession.
By the time we discover that our past expectations were wrong, the investments have already been made, and it takes time for the new investments implied by the new set of expectations to begin producing to meet the new structure of demand. Cyclically persistent unemployment is the result.

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COMMENTS (5 to date)
Patrick writes:

I think he's right, and the conclusion I reach is that free markets are doomed. Increasing specialization makes careers more precarious, and people respond by demanding some kind of insurance scheme. The welfare state is the result. Perhaps we will reach an equilibrium where the state inhibits the economy to such an extent that innovation stops and the insecurity so many people dread stops worsening as well.

If he's right, and there's really no end in sight, then there will be a time when people spend half their lives training for super-specialized professions, and half the time an unforeseen technological advance will eliminate that profession before that huge investment has a chance to pay off. Individual prosperity will depend much more on luck than it does today. Even for those who guess correctly, family formation will be much more difficult. The ability to have a family is the invisible fulcrum of politics. If the welfare state looks like a much better deal on those grounds, expect overwhelming popular support for it.

Will someone persuade me this isn't as bad as it looks?

paul writes:

Arnold, thanks a million for your economic references to Fischer Black. Time will ultimately show that he was the singular intellectual giant in economic and financial thought.

Patrick, its OK ; ) the decision to "super-specialize" is like any other risky venture. high risk high return. A person doesn't have to make that decision. he can opt for a lower expected return by generalizing. Those decisions were make in the past, they're made now and will be made in the scary future. it doesn't necessitate the welfare state. the welfare state has its own incentives...

J Oxman writes:

Black's theory of capital appears to be consistent with an Austrian approach. Also with PSST, if I'm not mistaken.

I would have liked to see what Black would have done if he'd followed Wicksell instead of Fisher.

On the other hand, his theory about growth seems to put institutions into the back seat, which is more or less what I'd expect from a mathematician coming to economic growth theory through finance.

I'm afraid Mehrling is right, though - the deeper insights of Black are lost on the new generations of economists (and old ones, it seems) because of the success of Black-Scholes-Merton.

Various writes: Say I'm a one-person tax accounting firm in 1971. I type letters to clients on my trusty IBM Selectric (sp?). I do tax returns by hand with pencil and paper. I can make and receive calls only when in the office. I have no computer. Roll forward to 2011 and my productivity is much higher. But I'm still the same one-person accounting firm. In this simplistic case, specialization has little to no effect on my productivity, although it does play a part indirectly. The 2011 firms that make my cell phone, accounting software and PC are certainly more productive than they were in 1971, although similar to my accounting firm, I don't think that specialization is the only factor or even the dominant factor that allows these firms to make the cell phones, accounting software, etc.

When looking at these larger firms, consider Boeing or Caterpillar. Are these firms, and their supply chains, that much more specialized today than they were in, say, 1945? I don't think there is a material difference. Yet the 787 is certainly a more advanced and productive aircraft than the B-29.

BZ writes:

Hmm.. During innovation, I can't see employers sitting idle waiting for perfectly specialized labor to appear. Instead they would (and do) hire the closest-best workers available.

For example, when computers appeared in industries in the 50s and 60s, mathematicians were often tapped to be computer programmers (a horrid mistake my industry is still struggling to correct -- we would have been better off with musicians or english majors).

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