Economics 101: Wages

Employment and wages.

     G. Reisman in one of his blog posts purports to prove that lower wages will result in lower unemployment, but that the standard of living will not fall. See: http://georgereismansblog.blogspot.ca/2011/04/wages-and-irrelevance-of-worker-need.html

     The key claim is:
     A drop in wage rates to the full employment point does not imply any drop in the average worker’s standard of living. That is, it does not imply any reduction in the goods and services he can actually buy — any reduction in his so called real wages — because the elimination of unemployment that the fall in wage rates brings about means more production and a fall in costs of production, both of which mean lower prices.

     Reisman’s theoretical argument is very nice. Assuming his premises were true, the conclusion follows. His major assumption is that lower wages will increase employment. His minor assumptions are a) that if wages fall, businesses will hire more workers; and b) production costs will fall. But his argument leaves out the human factor. His simplistic theory would work if people weren't people, and if the economic system weren't a human construct.
     What Reisman doesn’t take into account is that the employer will not pass on the lower costs of production any more than he absolutely has to. In other words, he will try to keep as much of the lower cost of production as profit as he possibly can. What’s more, if he can raise his prices because of the higher demand (which brought about his need for more workers in the first place), he will do so. The notion that increased supply lowers prices, and increased demand raises them, ignores the fact that someone has to decide to ask more (or less), and someone else has to decide to pay more (or less). These two decisions are not complementary. More precisely, they are not symmetrical. Marketing experts know this, and do their best to shift the asymmetry in the vendor’s favour.
     In any case, business people don't think in terms of the economic system or economic theories any more than workers do. Reisman assumes that a business will hire more workers just because wages are lower. Why would a business do that?  Businesses think in terms of the work they have available to produce the goods they wish to sell. If a business doesn't need additional workers, it won't hire, even at lower wages (or lower taxes, for that matter). The argument that lower wages result in more employment is I think founded on the same fallacy as "Save more if you buy two!" On the other hand, if the market demand for the goods is there, the business will hire, and may even pay a higher wage in order to get the workers it needs.
     The economic system is the net result of how people see their economic choices, plus the confusing factors of desire, fear, greed, generosity, fashion, obligations, and so on. Abstract economics can capture these factors if it begins with observations of how people actually behave, but it’s fiendishly difficult, because you can’t run experiments in which these factors are controlled. Statistical analysis can give a rough picture of how these factors affect economic choices, and marketing strategies rely on these rough guides. But as spectacular marketing failures and successes have shown, these statistics are more of a guide to placing bets than principles to guide planning.
     Worse, the human factors interfere with each other. Consider price (again). One of our desires is to fulfill our obligations to those people whom we love, or fear, or wish to influence in our favour, or merely to impress. But we also desire to get the most for the least. For each of us, for any given purpose there is a threshold price above which we won’t buy. But there may also be a price below which we won’t buy. That is, the threshold prices depend on why we desire the goods. Casual observation suggests that many people will pay more when they wish to impress someone than when they wish to express their affection. Conversely, people will often ask a lower price from people they wish to impress, or will even give the goods gratis. Why? Because a gift creates an obligation. Capitalist economics, which assumes that the purpose of trade is to amass wealth, doesn’t capture this aspect of pricing. In fact, it can’t capture it, because the Capitalist assumption is that the purpose of economic activity is to increase wealth. (It’s certainly Reisman’s assumption). That wealth beyond subsistence is almost always a tool for achieving other goals is something that Capitalist apologists don’t seem to understand. On top of that, traditional economics assumes that economic decisions are rational.
     Actual observation of business behaviour shows that lowering costs does not result in increased employment unless corresponding lowered prices increase the demand, ie, if the price of goods falls below the threshold price of an additional group of potential buyers. In that case, the producer may well need more workers. However, technology is the spoiler in this neat theoretical argument. Technology may make it possible to lower costs and employment simultaneously. Lower wages cannot compete against more efficient technologies. That lowering wages reduces the buying power of the workers, and so may reduce the market for the employer’s goods, is something that is, as far as I can tell, rarely a consideration. Technology can also obsolete the vendor’s goods, in which case there is no price low enough to prompt a decision to buy. To take the stereotypical example: motor cars made the buggy whip obsolete.
     However, abstract economics built to defend an ideology doesn’t capture these human factors, it is in fact incapable of doing so. If, as Ayn Rand’s Objectivism posits, wealth is the end-purpose of life, then any stance that sees wealth as something to be used for other purposes is meaningless. In a very real sense, using wealth as a means and not an end is unimaginable to adherents of Rand’s ideology. Significantly enough, Reisman states that his musings are in part based on her ideology. This may explain his preferences for diagrams and theorems that leave out merely human factors.
2014-09-04

Philosophy & Ideology

     Margarethe von Trotter, speaking with Michael Enright about her film on Hannah Arendt: “...Germany was known as the country of philosophers, music, and so on, how could it become such a horrible country during the Nazi time?...”
     Because it was the country of philosophers. People who are word- and idea-focussed have a hard time distinguishing between the world as they think it is and the world as it really is. Ideology is the terminal disease of philosophy. It’s the condition of mistaking thought for reality.
     Germany also vastly over-valued academic achievement, the assumption being that if you had a Ph.D. you were superior in every way. But academic achievement is more a matter of grinding out the work. Imagination and insight are rarely required, and even more rarely rewarded.

2014-07-20

Truth

Adapted from my post in comp.ai.philosophy 2010-07-19
Thread: Truth (Was: Re: PROOF INFINITY DOES NOT EXIST!)

     I don't think "exist" is a good word to use about truth. I prefer "subsist" as the technical term. But that's a side issue. This sub-thread on truth is marred by an absence of definition. Exactly what is meant by truth? What do the other contributors to this thread mean?
     All the examples used are statements, which should be a clue. That is, an implicit stance in all the arguments so far is that truth is a property of statements. I don't think that is a good enough concept, as part two of this screed will I hope demonstrate.

A) Formal (logical) and contingent truth
     I taught formal logic in high school (I sneaked it in under the aim of "teach critical thinking"). As you might expect, some students twigged to the fact that "truth" is a vague, ambiguous, polysemous, slippery term. Our discussions covered the following points.
     "Logical truth" is clearly defined: A statement is "logically true" when it has the form X = Y, where X and Y are well-formed statements in some language, and the rules of inference allow the transformation of X into Y, and vice versa. Note that this is a characterisation of a statement.
     However, it is not clear that X or Y are themselves true. A logical argument can demonstrate that some conclusion follows from some premises. If the premises are true, then so is the conclusion. But logic cannot demonstrate that the premises are true. You can show that the premises follow from some other premises, and so on, until you get to the axioms. But the truth of the axioms must be assumed. Therefore we need some means for agreeing on the truth of the premises.
     At this point in the discussion, students started invoking experience, common sense, obviousness, etc. And realised that "what is true for one person is not true for another." It was difficult to get them past that, but in the end most accepted that some replicable procedure could guarantee a limited truth: If we have the same experience, and say the same or similar things about it, then the odds are that what we say is true, more or less. If we differ, then what we have said is more or less wrong. Since someone can always disagree about what we have said, all statements about common experience are more or less wrong (and conversely more or less true). This too is a characterisation of statements. Here we have contingent truth.

B) Truth as a relationship
     So, what do we mean when conceive "truth" as a property of statements? A statement is an image of a concept. It has the same relationship to a concept as a photograph has to its subject. Of both we say that they are "true" if we apperceive some similarity between the statement and the concept, the photograph and its subject. Ditto for a theory (model) and the slice of universe it refers to.
    IOW, "truth" is a relationship between image and object, where "image" can be a sentence, a picture, a piece of music, an equation, etc, and "object" is whatever those images "are about".
     That relationship between image and object is an unanalysed given: we either get it or we don't. It rests on some formal equivalences, on patterns. We are a pattern-perceiving species, so much so that we often perceive patterns "that aren't really there", in the sense that a slightly different point of view may destroy the pattern, while a "real" pattern can be perceived from several (sometimes drastically different) points of view. Science has been characterised as the search for patterns that remain the same no matter how you look at them: these patterns are called symmetries.
     In a sense, we are democratic about truth, as other posters seem to be claiming. That is, if a lot of people can see the same pattern from many different points of view, and/or if many people can replicate the pattern by some agreed-upon process, it is "really there." But we are also elitist: some patterns can be perceived only after more or less arduous training. But amongst those who have undergone this training, there is a pretty strong consensus on what the "real" patterns are, hence on what can be truthfully said about them.
     It should be obvious that consensus truths are contingent. They are also empirical: Some unanticipated future experience may change our notion of what they refer to, of their limits as true statements. This is so even in the realm of formal truths, where we often do not know a priori whether any two statements are logically equivalent, or whether some set of premises implies some set of conclusions. Only the experiment of devising proofs can decide the question. And those proofs may show that the equivalence or conclusion is limited to a range of values (i.e., objects that it refers to). In this respect, mathematics resembles empirical science.
     For more on how we arrive at some consensus about what's true, see Bas van Fraassen's The Empirical Stance (Yale University Press, 2002).
     Disclosure: Bas and I were classmates many years ago, and discussed much of what I've distilled above. He discusses these themes much more expertly than I can. Hence my recommendation of his book. We do not entirely agree: Ask two philosophers a question, and you'll get four answers. At least. ;-)

Poirot: Deadman’s Folly (2013)

 

    Poirot: Dead Man’s Folly (2013) Ariadne Oliver calls on Poirot because a Murder Hunt that she’s organised doesn’t feel right. A convoluted plot involving adultery, fake identities, family loyalty  and such eventually unravels and the perps are unmasked. Many of Christie’s plots are implausible in the cold light of hindsight, but this one is more implausible than most. It’s also a weak entry in the David Suchet Poirot series, with too many shots of Poirot doing his Chaplin walk around the grounds of the house, along the river, in town, and so on. **

Peter Robinson. The Summer That Never Was (2003)

     Peter Robinson. The Summer That Never Was (2003) A late Inspector Banks, after his divorce from Sandra and an affair with Anne. The bones of a childhood friend of Banks restart the investigation; Banks offers what little information he has, and ends up helping the young female DI. Meanwhile, a boy of similar age goes missing, and Anne and Banks handle that case. It’s murder of course, but not an intentional one. Banks muses that both boys were failed by the adults in their lives; Robinson didn’t need to point that moral except as further evidence that Banks is not your ordinary cop. The attraction of these books is the ambience and the characters. Robinson writes novels about crime, not crime novels. I like them. This one’s as good as the first one I read, A Necessary End. **½

 

Rex Stout. The League of Frightened Men (1935)

     Rex Stout. The League of Frightened Men (1935) This is a very early Nero Wolfe tale. Stout is still developing the characters. Archie doesn’t yet have a steady woman friend as in later novels, Wolfe is more a collection of tics than a person, the rest of the household are mere animated scenery, and Inspector Cramer is not yet the frequently enraged opponent and rival of Wolfe. The plot is simple enough: a hazing accident leaves one of the freshmen with a bones that heal crookedly, and a permanent grudge against his classmates. Two die, and a threatening letter appears in the remaining men’s letterboxes. They hire Wolfe to remove what they perceive as a threat to their lives. Wolfe delivers, but not before a real murder occurs and one of the group is unmasked as fraud and killer. Good stuff, nicely handled. Many of the later Nero Wolfe tales seem perfunctory by comparison to this one. ***

Ronald Lewin. Hitler’s Mistakes (1984)

   

  Ronald Lewin. Hitler’s Mistakes (1984) Consider how well Hitler worked towards achieving his goals, without considering their moral and ethical dimensions. That’s Lewin’s stance, and he shows that Hitler failed miserably. Hitler’s primary mistake was that he would not or could not understand that governance was more important than vision. His vision of a Thousand Year Reich might have been achieved, if he had studied how previous empires succeeded: by utilising the plodding and unglamourous skills of the bureaucrat and functionary. His secondary mistake was in the vision itself, that of a Herrenvolk lording it over a vast class of serfs. And his third major mistake was setting his underlings and colleagues against each other so that there was no stable structure of government to maintain the state after his death. Even if he had gotten out of the war with his skin and his nation more or less intact, the Thousand Year Reich could not have survived his death.
     In short, he was not only a psychopath, he was a stupid psychopath. Unfortunately, too many Germans followed him despite all their misgivings, despite their realisation that his vision was unsustainable, despite his blatant incompetence. That’s what needs to be explained, because there’s plenty of evidence that the more analytical (and cynical) of Hitler’s compatriots could see through his flim-flam. Why did no one call his bluff?
     His Party comrades, like him, did not look beyond their immediate concerns. Power and self-gratification motivated the ruling Party elites, and those motivations make it difficult if not impossible to think about or imagine anything beyond one’s own life. Corruption of all kinds was endemic. Everyone was trying to secure some power base for the time when Hitler died. Trying to unseat Hitler or cross him would have eliminated any chance of creating the kind of fiefdom that they craved. So they went along, most of them to the bitter end.
     The military caste was conflicted. On the one hand, they had sworn an oath to Hitler, and saw their duty as protecting the State as well as they could. On the other hand, they soon saw through his pretensions to military competence, but the habits of hierarchy prevented them from doing what a looser social structure would have enabled them to do, to mutiny and take power from him.
     The ordinary German was seduced by a vision, by images of German power and influence, by what amounted to a religion of the Volk. Most of them, like most people anywhere, didn’t engage in politics as a method of governance. Politics is either something to be left to other people, or a quasi-religion adopted to validate one’s sense of being an important player on the world stage.
     Hitler was in all respects a pathetic human being.  It’s thoroughly depressing that his charismatic gifts misled so many Germans into following him.
     Lewin makes a good case. He’s a true historian, basing his narrative on primary sources as much as possible. I recommend this book to anyone who wants to understand the Nazi era better. ***