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Here's a little rant I wrote two years ago...
Then, in Adam Smith's Wealth of Nations I found an explanation of the relation between economic growth and general welfare (although not phrased in those terms). Smith starts with a bit on living wages:
But though in disputes with their workmen, masters must generally have the advantage, there is however a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.

A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasion be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.

Interestingly, Smith assumes that children will be employed in a similar occupation to their parents. His living wage, to use modern parlance, must be really modest, because today's "working poor" still manage to survive and produce families. Then, a little bit on labour relations...
When in any country the demand for those who live by wages, labourers, journeymen, servants of every kind, in continually increasing; when every year furnishes employment for a greater number than had been employed the year before, the workmen have no occasion to combine in order to raise their wages. The scarcity of labour occasions a competition among masters, who bid against one another, in order to get workmen, and thus voluntarily break through the natural combination of masters not to raise wages.
Now for the relation between minimum wages and economic growth:
The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stocks is the increase of national wealth. The demand for those who live by wages, therefore, naturally increases with the increase of national wealth, and cannot possibly increase without it.

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. England is certainly, in the present times, a much richer country than any part of North America. The wages of labour, however, are much higher in North America than in any part of England.

[...]

But though North America is not yet as rich as England, it is much more thriving, and advancing with much greater rapidity to the further acquisition of riches.

[...]

Though the wealth of a country should be very great, yet it has been long stationary, we must not expect to find the wages of labour very high in it. The funds destined for the payment of wages, the revenue and stock of its inhabitants, may be of the greatest extent; but if they have continued for several centuries of the same, or very nearly of the same extent, the number of labourers employed every day could easily supply, and even more than supply, the number wanted the following year. There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another in order to get them. The hands, on the contrary, would, in this case, naturally multiply beyond their employment. There would be a constant scarcity of employment, and the labourers would be obliged to bid against one another in order to get it. If in such a country the wages of labour had ever been more than sufficient to maintain the labourer, and to enable him to bring up a family, the competition of the labourers and interest of the masters would soon reduce them to this lowest rate which is consistent with common humanity. China has been long one of the richest, that is, one of the most fertile, best cultivated, most industrious, and most populous countries in the world. It seems however, to have been long stationary. [...] The accounts of all travellers, inconsistent in many other respects, agree in the low wages of labour, and the difficulty which a labourer finds in bringing up a family in China.

[...]

China, however, though it may perhaps stand still, does not seem to go backwards.

[...]

But it would be otherwise in a country where the funds destined for the maintenance of labour were sensibly decaying. Every year the demand for servants and labourers would, in all the different classes of employments, be less than it had been the year before. Many who had been bred in the superior classes, not being able to find employment in their own business, would be glad to seek it in the lowest. The lowest class being not only overstocked with its own workmen, but with the overflowing of all the other classes, the competition for employment would be so great in it, as to reduce the wages of labour to the most miserable and scanty subsistence of the labourer. Many would not be able to find employment even upon these hard terms, but would either starve, or be driven to seek subsistence either by begging, or by the perpetrating perhaps of the greatest enormities. Want, famine and mortality would immediately prevail in that class, and from thence extend themselves to all the superior classes, till the number of inhabitants in the country was reduced to what could easily be maintained by the revenue and stock which remained in it, and which had escaped either the tyranny or calamity which had destroyed the rest. This perhaps is nearly the present state of Bengal, and of some of the other English settlements in the East Indies. In a fertile country which had before been much depopulated, where subsistence, consequently, should not be very difficult, and where, notwithstanding three or four hundred thousand people die of hunger in one year, we may be assured that the funds destined for the maintenance of the labouring poor are fast decaying.

Smith ends with the following indictment of the East India Company:
The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries.
Why is this important?

In modern language, I think that Adam Smith is simply saying that wages are in a direct correlation to GDP per capita, which should not be surprising. This explains the emphasis on growing the GDP. Still, what if GDP growth is not sustainable for one reason or another?

There is, in fact, every indication that our current economic model is unsustainable. Resource depletion and environmental damage are almost irrepairable. Exponential GDP growth can only go on forever if the "Production Possibility Frontier" expands exponentially. The problem is that the expansion of our economy is fuelled by nonrenewable resources, and so at some point the PPF might stop growing fast enough. Considering also that a substantial fraction of the world's population survives on less than $2 a day, and that even in the "first world" long-term unemployment is rampant and only getting worse due to outsourcing, it might be that any GDP growth is only benefitting the moneyed elite, and not the generality of the working poor.

Assume for a moment that there are limits for growth of the world's GDP. Then the only way to prevent a general decay of living conditions, even for us in the first world, will be to substantially reduce population, but this is not about to happen.

So, the question is, is there a way for "steady state economics" to escape the very unattractive depiction that Adam Smith makes of it? As the efficiency of labour increases with time even with a constant GDP, are the only alternatives either a decrease in population or in living standards, or both?

To end on a grim note, it is clear that war is a way to keep the GDP growing. You spend money on making weapons, then spend money paying people to use up those weapons destroying resource, capital, and killing people, and then use even more money in reconstruction. However, if the world reaches a point where the only way to increse the GDP is war, the relative size of the "war industry" in the world economy will increase until the whole economy is in war mode, and we end up living in a world not unlike Orwell's distopia. Is this what Eisenhower was warning about when he spoke of the dangers of the military-Industrial complex?



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 06:20:39 AM EST
I think that Adam Smith is simply saying that wages are in a direct correlation to GDP per capita

To GDP or the rate of GDP growth?
by Colman (colman at eurotrib.com) on Thu Jun 29th, 2006 at 06:28:03 AM EST
[ Parent ]
I think he probably means GDP growth as a proxy for aggregate wealth growth (assuming the ratio of GDP to aggregate wealth is roughly constant in time).

What he really is concerned with is the amount of productive capital and the value of infrastructure and land.

Part of the point is that productivity increases lead to a decrease in the demand for labour unless the amount of capital chasing after labour increases at least at the same rate.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 06:31:49 AM EST
[ Parent ]
Yes, but 'productive capital' is a complete fiction. Capital doesn't exist as a physical thing. It only exists if people choose to believe in it.

Natural resources certainly exist, and the destruction of natural resources has an obvious real-world effect.

So why do economists apparently prefer to deal with fictions than realities? I suppose one reason is that once upon a time capital would have been based on some notional and desirable physical incarnation of value such as gold. Or cowrie shells. Or wives. But today the notion that capital has a physical basis is obsolete. It's purely a social tradition. You can still buy things with capital, but that's only because everyone agrees to play the game and not ask questions about how it's played.

That's why you won't find a rational underpinning to economics and to ideas like GDP. It's like trying to find a rational reason for the pyramids.

To me the constant quest for 'growth' looks like any other irrational ritualistic anthroplogical activity. Humans seem to get stuck into these collective belief systems based on simple primate desires for more status and more resources - like pyramid building or 'growth' - and continue until the local ecosystem falls apart or some other drastic change happens. Otherwise there's no one outside of the system to point out that in most ways the beliefs and actions are really rather silly, if not actively destructive and pointless in a monkey-trap stupid kind of a way.

It's true there's a rather vague and inconsistent conflation of 'growth' with personal freedom that's often used a justification it. But we're on much shakier ground there, because it's hard to prove that this personal freedom is universal - for most of the world it hasn't been - or that it's not a kind of semi-voluntary ritualistic slavery, even among those it's supposedly benefiting.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 29th, 2006 at 01:04:03 PM EST
[ Parent ]
Capital doesn't only mean money, it means capital goods: tools, machinery, your computer.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 01:10:44 PM EST
[ Parent ]
Though Drew told me recently that in his opinion the distiction between money and capital goods is irrelevant.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 01:11:47 PM EST
[ Parent ]
Why would you draw a distinction between the two?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 29th, 2006 at 02:41:53 PM EST
[ Parent ]
Because it's questionable whether they're equivalent? It's not immediately obvious to me that they are, in the short- to medium- run (the real world) at least.
by Colman (colman at eurotrib.com) on Thu Jun 29th, 2006 at 02:43:57 PM EST
[ Parent ]
The point, if I remember correctly (which is, granted, always a big "if"), I was making was that sending machinery to a new plant in China was no different from sending money to finance a new plant in China.  One way or another, the capital needed to begin production is moving to the new production site -- hence, in this sort of example, my contention that there is no point in drawing a distinction.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 29th, 2006 at 02:54:20 PM EST
[ Parent ]
The point I was trying to make was that TBG is arguing that "productive capital" is a figment of our imagination, but was (IMHO) confusing capital with fiat money. I find the distinction between financial assets and capital goods useful at least for that reason. Also, there is more than one kind of "capital good" (if you insist, you can include various financial assets in that category) and the relative exchange values are meaningful whether or not one of them is a recognizable form of "money".

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 03:02:14 PM EST
[ Parent ]
Okay.  Fair enough.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 29th, 2006 at 03:20:16 PM EST
[ Parent ]
I don't think it's that simple. Most accounting systems seem to be based on an indirect assessment of the perceived value of tangibles.

My point is really that the bottom line - as its known - refers to perceived value in terms of this famous fiat money. In this world view the productive value of any asset - including money itself - can only be assessed in fiat money terms.

The fact that it's mythical fiat money that's being accumulated is very much the problem. By using only this one dimension of value the real social, personal and ecological costs of 'growth' can be kept hidden. And the benefits of social developments that can't easily be assessed in fiat money terms can (literally) be discounted.

So a factory or a computer can only be considered 'capital' in reference to this one dimensional value yardstick. These items may, or may not, have real-world productive value in the sense of personal empowerment and social development. But that productive value is always assessed indirectly in terms of a fictional fiat-money based number that hides information about how this kind of 'capital' is created and used.

It's not so much that I'm confusing the two - more that economic accounting is based on keeping the two confused.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 29th, 2006 at 03:25:59 PM EST
[ Parent ]
The relative fiat-money-value of two tangible goods is independent of the value of the fiat money and is a meaningful quantity. But you are right that converting everything to its fiat-money value can lead to counterintuitive conclusions. I am thinking that changing the numeraire (see my comment to DoDo in a parallel thread) would be a useful exercise to determine whether a value is real or an artifact of fiat money.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 03:31:26 PM EST
[ Parent ]
In that sort of example, you're right.
by Colman (colman at eurotrib.com) on Thu Jun 29th, 2006 at 03:20:55 PM EST
[ Parent ]
Miguel is, of course, right in saying that that money and capital goods are not absolute equivalents.  Obviously I can't walk into Wal-Mart with a piece of heavy machinery from a GM plant and exchange it for an iPod.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 29th, 2006 at 03:52:56 PM EST
[ Parent ]
Might be fun to try though.
by Colman (colman at eurotrib.com) on Thu Jun 29th, 2006 at 03:55:47 PM EST
[ Parent ]
The look on the cashier's face, alone, would be worth it.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 29th, 2006 at 03:58:31 PM EST
[ Parent ]
Money is fungible, capital goods are not.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 02:47:22 PM EST
[ Parent ]
There is a lot of confusion in Adam Smith's use of the term wealth (or at least in my understanding of it, not to speak of my understanding of economics, let alone 2 years ago).

Basically, wealth is the total value of assets. It is not GDP, which he calls revenue. But the critical quantity in this analysis is that part of the wealth which is allocated as productive capital (maybe that's why we should pay attention not to stock market capitalization) and, more importantly for the purposes of living standards, that part of capital which is "destined for the maintenance of labour".

It is the ratio of that quantity to the productivity of labour that gives a measure of the wages of labour.

Smith assumes constant, incremental productivity growth, implying wages will fall unless the "funds destined for the maintenance of labour" increase apace with the productivity.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 06:43:08 AM EST
[ Parent ]
(maybe that's why we should pay attention not to stock market capitalization)

I mean we should pay attention to market capitalization, not to price indices (though they are correlated).

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 06:46:10 AM EST
[ Parent ]
Basically, wealth is the total value of assets.

No.  Wealth is the value of assets minus liabilities.  (Or is that what you meant by "total assets"?)  GDP is not wealth.  It is, roughly, the aggregate annual income of the nation being dicussed.  ("Roughly" because that doesn't take into account earnings from goods and services produced overseas.)  The US figure for GDP is somewhere in the neighbourhood of $13-14 trillion, I believe, but total wealth in the US is somewhere in the neighbourhood of $60 trillion.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 29th, 2006 at 02:47:28 PM EST
[ Parent ]
Lots of entertaining thoughts to pursue. I might get into assembling my own thoughts. Right now, I'll pick up one bit that particularly stuck out to me:

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest.

How then can USA Congres still justify the continuous stagnation on labour wages? Didn't the USA GDP grow altogether? bonddad on DKos (one of the authors I still track) had a good post on that some two days ago, in which he also discussed the growing inequality within the States, another subject repeatedly flagged there and here.

I also read that union power in China has begun building, and unions are starting to clamour for higher wages and educate workers on their rights...

Now, show me that graph. And one... And two... And...

by Nomad on Thu Jun 29th, 2006 at 07:44:06 AM EST
[ Parent ]
Now, did the USA GDP grow below productivity?

Check out this graph from the SF Federal Reserve Bank

and the accompanying text:

What do the data show? For the period 2001 through 2004, we find no statistically significant relationship between productivity growth and employment growth across the U.S. states. To account for possible differences in underlying productivity, employment, and output growth, we also examined the relationships in the changes in these growth rates in recent years compared to previous periods. That analysis indicates positive but generally not statistically significant correlations between changes in employment and productivity growth. The absence of a negative relationship between productivity growth and employment growth is consistent with a wide range of firms working to make long-lasting improvements in efficiency.

Indeed, it appears that the states' employment growth rates in recent years have been related to output growth, rather than to productivity growth. This can be seen in Figure 3, which shows average productivity, employment, and output growth (GSP, or gross state product) for states that had not recovered jobs lost during the recession and those with employment levels at or above pre-recession levels. Average productivity growth across these groups is virtually the same (not different statistically). Employment and output growth, on the other hand, diverge, with fast growing states posting solid job growth, while the other states on balance have had jobless recoveries. For many firms, the gains in productivity have been sufficiently large to meet demand for their products, while firms facing stronger demand have been willing to hire new workers to meet it.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 29th, 2006 at 07:49:15 AM EST
[ Parent ]
It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. England is certainly, in the present times, a much richer country than any part of North America. The wages of labour, however, are much higher in North America than in any part of England.

And this is the central idiocy of Smith-ite economics.

Firstly, this is a purely ad hoc example. It's not based on a general sampling of different economies. This is hand-waving and supposition, not evidence-based economics.

Secondly, what sets worker wages is business practice. In the real world this means the extent to which shareholders and investors are willing to, or sometimes forced to, share financial profits with the people who do the manual and/or intellectual labour that create those profits. That includes elements of regulation, supply and demand, and other factors. But GDP seems like a relatively small influence on that - as you can in individual companies which are booming but still pay their workers the minimum they can get away with.

Unless I'm missing some direct evidence for the divine intervention of the Invisible Hand, that's the only factor that I can see that sets worker wages.

GDP is irrelevant. Even in a steady state economy, as long as there's profit and profit distribution, investors will be compensated and workers won't starve.

So why growth? Here's a different questions:

Is it possible for an economy to be sustainable and also innovative with zero GDP growth?

Heretically, I suspect it is. It's never been done, but I don't see why it couldn't be possible. The key difference would be in the finer points of the trading relationships, and in what is being traded. If it's intellectual or artistic property, education, shared experience, or other items with little or no ecological overhead, then it should be very possible.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 29th, 2006 at 08:56:56 AM EST
[ Parent ]

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