Arnold Kling  

My PSST Papers

My Two Favorite Graphs From The Wisdom of Robin Hanson, #n...

The Adam Smith Institute has just released a paper of mine on patterns of sustainable specialization and trade. An excerpt:

The PSST approach drops the assumption that production technology is known. Instead, the Smithian division of labour and Ricardian comparative advantage are constantly being developed and improved. Entrepreneurs, through a process of trial and error, figure out how best to configure production. In this process of ongoing discovery, there can be periods in which workers are unemployed, while the market mechanism tries to figure out how to utilize them.

For your convenience, I have put on my web site three academic papers, all pdfs:

1. My paper in Capitalism and Society
2. Peter Howitt's comment on my paper
3. The Adam Smith Institute paper (quoted above). The same paper is on their web site here.

Comments and Sharing

COMMENTS (10 to date)
Vacslav writes:

Arnold, do you think a quantitative micro-theory of PSST is possible at all? Perhaps something along the works of William Baumol who was attempting to develop a semi-quantitative theory of innovation - with some limited success. Stories and parables are good, but surely they can't serve as a predictive toolset. What is the set of predictive statements in PSST?

Becky Hargrove writes:

I also liken the (ongoing) process to a garden where the economic dialogue enriches the soil: seeds of ideas might sprout where further enriching of the soil has already taken place. The above paragraph you included allows such new ideas to flourish: in particular, the ongoing division of labor can now be applied to knowledge-based work in new ways, and (the more physical) production technology can be applied to areas once seen as labor intensive and resource exhaustive.

Hunter writes:


You wrote "major recessions take place when too many patterns of specialization and trade become unsustainable at once. The entrepreneurial adjustment mechanism is overwhelmed, and it takes several years for the economy to adapt."

I know the Austrian theory and Irving Fisher's theory of why this happens. I'm curious as to what you think is the cause of these clusters of failures.

Hunter writes:

After reading your Adam Smith Institute paper it sounds like you think major recessions are technological in origin and minor ones are more fluctuations in tastes that can be easily rebalanced.

Kevin Dick writes:

Arnold. I really like your Rubik's Cube analogy.

One of the reasons I like it is that it it vividly illustrates why you and Scott Sumner are _both_ right.

As I'm sure you know, there is an optimal amount of lubrication for a Rubik's Cube. Too little, and every move is a grinding battle. Too much, and moves spin past their desired position and your fingers slip.

I say that money supply is the lubrication. Obviously, just squirting more oil on the cube doesn't do any good. But your progress to a new PSST after the cube has been perturbed is going to be slow going without enough. And the farther away from a new PSST you are, the more oil you need to make the increased number of moves smoothly.

Rick Hull writes:


Arnold > major recessions take place when too many patterns of specialization and trade become unsustainable at once

Hunter > what ... is the cause of these clusters of failures.

A once-sustainable PST having lost its sustainability is not necessarily a failure, per se. The world is constantly changing -- think of resource amounts, resource profiles, regulatory environments, competition, etc. Henry Ford greatly impacted the sustainability of buggywhip manufacturers through no fault or failure of their own.

That said, of course outright failures (and collapses) beyond mere "failure to execute" happen. Bear Stearns comes to mind.

Is there a general cause to specific clusters of failure? I think clusters are a natural feature of random distributions. Likewise, given chains of production, failures can be contagious and infect business partners.

Xerographica writes:

Not quite sure what the advantage is of closing comments on older entries. Then I have to search around for the closest related blog entry that still has comments open and then try to figure out how to modify my comment so it's relevant to both entries.

Errr...speaking of patterns of sustainable specialization and your book Unchecked and Unbalanced you argued that, given partial knowledge, taxpayers should be allowed to choose between giving their taxes to government organizations or giving their taxes to competing non-profit organizations.

Personally, I would vote for your recommendation...but it's essential that we put it in context. With that in mind I created this blog entry...Libertarianism and the Free-rider address the issue of context.

In my entry I consider how willing anarcho-capitalists, libertarians and liberals would be to accept the following compromises...

Compromise A - Your libertarian recommendation
Compromise B - Pragmatarianism
Compromise C - Cait Lamberton's liberal recommendation Becky Hargrove pointed out...we need economic dialogue to enrich the soil. This is the second time I've referenced Becky Hargrove in my comments.

Your thoughts on this topic would be appreciated. It would be especially awesome if you could write an entry where you compare your recommendation to Cait Lamberton's recommendation.

[Sorry for the inconvenience caused by closing comments on posts older than 30 days. They are spam magnets.--Econlib Ed.]

Glen S. McGhee writes:

"... Instead, the Smithian division of labour ... are constantly being developed and improved."

This is exactly the problem: responsibility for the whole evaporates, displaced up the pyramid until no one in the rank and file has any moral courage.

Haven't you read Weber and Baumann? Uncontained role differentiation ends in disaster. Your worst corporate nightmare. How else do you think Hitler implemented the Holocaust?

Becky Hargrove writes:

Let me briefly explain how I came to embrace that 'future division of labor'. First, not everyone needs to do this (rural communities are the primary need), the benefit comes in by achieving - at local levels - wealth from the knowledge of the whole. Division of knowledge labor is a very different animal from the former divisions of the factory floor. We do not perform such knowledge divisions over and over endlessly, but as part of knowledge-based skills portfolios - on our own time - of which we are the entrepreneur.

Skuter writes:
In this process of ongoing discovery, there can be periods in which workers are unemployed, while the market mechanism tries to figure out how to utilize them.
Arnold shouldn't that read: In this process of ongoing discovery, there can be periods in which workers are unemployed, while entrepreneuers, utilizing the information embodied in, and disseminated through the market mechanism try to figure out how to utilize them...?

How does your theory accord with a non-monetary overinvestment theory? I can see a lot of similarity...

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