Sunday, October 7, 2012

Joseph Stiglitz, Nobel Luddite

Evil, thy name is automation. 
Joseph Stiglitz, a Nobel Laureate, is undoubtedly one of the most brilliant economists alive today. From his work on asymetric information and its effects on microeconomic and macroeconomic decisions to his work at the World Bank and the Clinton White House he has proved himself to be a giant in the field. So I was mightly suprised to read this boneheaded quote, with regard to why the Fed's low interest rate "policy" is bad.

"Today, persistent low interest rates encourage firms that do invest to use capital-intensive technologies, such as replacing low-skilled checkout clerks with machines. In this way, the Fed may still be contributing to a jobless recovery, when we finally do recover."

So additions to physical capital by firms displace workers and kills jobs. If we want to create jobs and end the jobless recovery, we should, I supose, ban purchases of capital equipment by firms and force them to use more labor to produce the same output. Dear God. Actually, I've got a Milton Friedman anecdote right here that's better than my unqualified snark.

"He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels."

P.S. By the way, I think I know the premise Stiglitz was working with here. Its a micro equilibrium condition that determines how much capital and how much labor a firm will use to hold output constant and minimize costs (hence maximizing profits). It goes like this: 

MPl/w = MPk/r 

Where MPl and MPk are the marginal products of labor and capital and w and r are wages and interest, or the cost of labor and cost of capital. Arithmetically, if you lower r relative to w and hold the marginal products and total output constant, you find it behooves the firm to use less labor and more capital to produce the output. I think Stiglitz extrapolated this single-firm condition into a fallacy of composition to the entire economy, ignoring that increases in investment leads not to displaced labor but to an increase in the marginal product of labor, increased, not decreased, labor demand, and RISING, not constant, output. 

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