Arnold Kling  

Trade, Mechanization, and Displacement

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James C. Cooper writes,

Between 1999 and 2009, these large global corporations pared 2.9 million workers from their U.S. payrolls while adding 2.4 million jobs at their foreign affiliates. That's a reversal from the previous decade, when they boosted payrolls across the board, including increases of 4.4 million in the U.S. and 2.7 million overseas. These companies are simply doing what most small outfits cannot: They are going where the business is. Between 1999 and 2009, BEA says, sales by U.S. multinationals in the U.S. increased by 25 percent, to $7.8 trillion, but receipts from their overseas operations more than doubled, to $4.9 trillion.

When I get around to writing a full blog post on Amy Sue Bix's book on technological unemployment, it will have lots of excerpts. I am finding it the right book at the right time for me.

There is an equivalence between mechanization and opening up new avenues of trade. Both increase average productivity. Both serve to displace existing workers. Both can be fit easily into the framework of Patterns of Sustainable Specialization and Trade.

One of Bix's points is that mechanization displaced a lot of workers in the 1920s and 1930s. But in the 20s we had good times, as classical economics would predict. In the 30s, we had the Depression. Similarly from 1990 to 2000 we had good times, even though workers were being displaced by trade and offshoring. Currently, we are having very high unemployment.

Bix documents the constant back-and-forth between people who argued that mechanization was happening too quickly for humans to adjust and those who argued that higher productivity represented progress. I think that both sides had a point. Yes, in the end we benefit when goods and services can be provided at low cost. However, in the short run displaced workers do lose income and dignity. So, it is not quite right to tell the opponents of progress, either through mechanization or trade, just to shut up. I wish that government had a magic pill that it could prescribe to alleviate the problems of displacement. Unfortunately, the pills that it delivers seem to do little good.

The AS-AD framework would say that the hard times are due to deficient aggregate demand. The PSST framework says that the hard times are due to the inability of the market to accomplish all of the adjustments needed given the changes to the environment.

I am toying (forgive the pun) with a Rubik's Cube metaphor for the economy. Standard models use equations as a metaphor, along with doing mathematics that applies to infinitesimal changes around equilibrium. I think this is very limiting in terms of what it can describe.

Imagine a ridiculously hard Rubik's Cube, with each side 10x10 or 20x20. Moreover, as the player attempts to solve the cube, every once in a while a demon takes the cube away and rotates it randomly, setting up a new puzzle, before giving it back to the player. The cube never gets fully solved before the demon does its thing again.

We have good times when most of the colors are on the correct side. We have bad times when the demon is particularly devilish, or when the player makes a mistake, or when the player has to rotate pieces away from their correct side in order to set up later moves.

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COMMENTS (4 to date)
Dave writes:

You'll need a theory for the demon to satisfy Austrians...

hsearles writes:

I think that the metaphor of a Rubik's cube brings in too many unsound elements to make a good metaphor. The largest problem is that not only does it imply that the economy can be solved by a single actor (the fact that you have multiple actors within your metaphor is rather ad hoc just as the fact that it is scrambled by a demon midway through solving), but it also takes attention from coordination elements. The latter is the more troublesome since it is a step away from the sound exposition of economic order as the result of coordinating efforts found in the PSST back towards the unsound exposition of it simply as a system of equations.

The reason that I say that is that the Rubik's cube, no matter how complicated, is a mathematically solvable game. By including it in the metaphor there is the inevitable implication that all one needs to do to solve the economy is to get genius macroeconomists to discover the right equations. However, as we all know, that is nothing but scientistic babble so it should send up red flags immediately if that is an implication. In this sense, the metaphor is even a step towards the AS/AD paradigm in that it implies that once the needed adjustments are discovered, then all that economic policy needs to do is to pull the necessary levers and make those adjustments happen.

I will be the first to admit that the notion of the coordination problem and the emergence of orders resulting from that can be a difficult concept to wrap one's head around. However, I would suggest that the heart of the problem is that most people have never been educated in this type of thinking. The very concept of emergence is one that very few students have ever been introduced to outside of economics and even high school biology does not touch the matter when evolution is thought. What is taught, though, are the methods and paradigms of the natural sciences and that is one reason why the AS/AD paradigm is so intuitive since after Samuelson it has followed the example of physics and thermo-dynamics.

As a result, what is needed is not a flawed simplification of coordination into an easily misunderstood form is not going to make the economic problems of coordination easier to understand. This is just going to muddle one's thought-process about coordination and make the problem even worse. Instead, I say that coordination needs to be treated as something that needs to be grappled with and that, like it or not, it will require some effort on the receiving end.

blink writes:

Re: hsearles, I don't think we need to assume the economic Rubik cube is solvable. Maybe it has seven colors total or two more blue squares than yellow squares.

Probably the demon has the power to re-paint the squares -- much more powerful than performing the standard moves. Some (a priori unknown) sequence of moves should release the demon, or perhaps one of many possible demons. Ideally, the demon arises endogenously.

Patrick writes:

While the Rubik's cube metaphor will work as intended for most people, it, unfortunately, depends on some misconceptions about Rubik's cubes. I know a lot about them, so I'm going to be the insufferable pedant.

All cubes can be solved with simple algorithms. Inventing those algorithms was challenging, but now that we have them, solving cubes requires zero creativity. There is at least one program which will let you try solving giant cubes (50x50x50, for instance). The same algorithms work (with some modifications). Learn the technique, grind, grind, grind, and you're done. It's an endurance competition.

Tampering with someone's cube during a solve is merely a nuisance. The algorithms are short so there isn't much state to be destroyed.

An economy, however, is a puzzle which changes over time. New techniques have to be invented. Trying to execute the old ones faster and better fails because the demon turned the checkers game into a chess game.

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