There was a reminder of this today in a comment by jrbarch:

I was in a ‘Human Services’ office the other day and all that I could see was an economic prison camp with a lot of hypnotised people on both sides of the counters. ... I think If I had mentioned a BiG [basic income guarantee] I wouldn't have gotten out of there alive! ... I think people will have to revalue what is precious before any major changes can happen - and precious to the heart of a human being more so than mind or body.

Without meaning to be negative – scrap that, the negativity is fully intended – I doubt there is much prospect of the majority re-evaluating priorities any time soon. Maybe this is just the pessimistic outlook of someone living at the "arse end of the world" (the private and apt description of this nation by a former prime minister). Down here, it is obvious what the majority wants: more for itself, less for others, cruelty to refugees, meanness to the unemployed, intolerance, war on foreigners, wider inequalities of income and wealth, austerity, privatization of public utilities, more raping of the environment, dumbing down, "reality" television, and other crimes against the universe too numerous to mention.

Perhaps there is some kind of awakening occurring on the rest of the globe? I hope so. That would mean we at the arse end of the world would attempt to imitate it twenty years from now. Or maybe prospects are just as grim there as here, with neoliberalism as entrenched as ever?

Jim O'Reilly has a good post on a somewhat related topic of political groups seeking to "reclaim the center". As far as I can see, those who claim the center for themselves typically value and push for greed, cruelty, and the various crimes against the universe partially listed above. As Jim notes:

There are few terms in our political discourse more abused than “the center”, having as it does the valuable connotations of being non-radical, reasonable, intelligent, and moral. It’s way past time we assign it a proper meaning.

I propose we consider political views “central” if they’re rooted in the real world and conform to the basic moral philosophies common to the major world religions and philosophical works.

Compassion, Schopenhauer tells us, is the basic center of morality and that view is widely shared in most religious and philosophical traditions. Veblen perceptively linked the brotherly love aspect of Christianity to the instinct of workmanship and its serviceability to the common good. Without getting any more philosophical, I think it’s reasonable to claim that compassion, brotherly love, and the common good are reasonable distillations of widely shared moral teachings and are therefore fundamentally centrist.

From what I can tell, anyone who attempts to live by basic moral teachings that are currently held up as mainstream (e.g., the teachings of Jesus, in the West), will be treated as an extremist by the same mainstream that professes to believe in these teachings.

The social objectives of progressives largely align with these mainstream teachings, compassion being central, and this must partly explain the hostility we confront. For the majority, these objectives are to be piously mouthed, never put into practice, in fact actively opposed if expressed through action. The social objectives themselves are not radical at all. Rather, most people's lives are radically at odds with the religious or philosophical claims they make for themselves.

A basic income guarantee should be a no brainer in societies where government macroeconomic policy deliberately ensures some people who want a job will not be able to obtain one. It is radical to suggest otherwise.

But most people clearly do believe otherwise. Most of those in the middle class who have come under financial stress since the onset of crisis, and who may currently consider their situation unfair, evidently didn't care about those who were in a similar predicament prior to the crisis.

For the past forty years the middle class has:

– voted for high unemployment on the understanding that it wouldn't apply to them;
– were indifferent to the withdrawal of social safety nets for the dispossessed and marginalized;
– celebrated the liberation of money capital and enslavement of child labor;
– offered no critique of the Art of Modern Finance until it offended their aesthetic sensibilities personally;
– smiled on Western military aggression and extreme deprivation of the poor of the world, or turned a blind eye.

But now we're meant to care that the Joneses might lose their McMansion in Shitsville, granny's afraid of the scary immigrants, and uncle talks back at talkback radio.

When the suffering affects middle-class people directly, they suddenly discover a social conscience. But when they think the neoliberal policy agenda will leave them personally unscathed, their concern soon goes missing.

By the same token, if the positions of a poor person and a rich person were reversed, how quickly would the "values" and political positions of the two hypothetical individuals reverse as well? Probably, in most cases, pretty darn quickly.

My guess is that if it were up to the majority, things might well be worse for the poor than what the ruling class currently thinks it can push through politically. In all likelihood, the attack on personal liberties and the rise in recent years of police brutality against those who oppose the current social injustices through protest would be more – not less – extreme if the majority had its way. (On police brutality, it's hard to go past this article from 2011: Read This Before You Protest: An Open Letter to Occupy Portland from a Public Defender. Hat tip to Antipas Ministries for this link.) There might well be more war, not less, more environmental destruction, more poverty, more bigoted foreign policy, harsher conditions on welfare recipients, and so on, if the majority had its way.

Most people were bigots in Jesus' day, or Gandhi's day, or whoever's day, and most people are bigots today.

One view, as jrbarch discusses in his comment, is that all this is just a dream or illusion:

Where is the movement, where the rest on that shore?
There is no water, no boat; no oars-man there
There is not so much as a rope to tow the boat, nor a man to draw it
No earth, no sky, no time, no-thing is there: no shore, no ford!

There, is neither body nor mind: and where the place that shall still the thirst of the soul? You shall find naught in that emptiness.
Be strong, and enter into your own body: for there your foothold is firm. Consider it well, O my heart! Go not elsewhere.[Kabir]

[A]ll of you good folk treat [macroeconomics and the economy] as very real! I have been making some sort of attempt to bridge the two worlds but I can see it is impossible for me. It needs experience. Seen from the perspective of economics the above from Kabir would seem other worldly, ethereal. Seen from a place I know within myself it is perfectly straight-forward and substantial - the earth, humanity and the play we have enacted for ourselves ‘other-worldly’. Unreal in fact. Incredibly unconscious.

Maybe all this is just a game to see how low we are capable of stooping? Hitler and Stalin may be in the lead as we speak, with the neoliberals some way behind, but there is still at least a little time remaining on the game clock!

Whether it's real or just an illusion, of course progressives should continue to defend and promote their basic values, which are broadly in line with what the majority claim to believe but deny through their actions. But I see little point in hand-wringing (though we do it so well!). The lack of social progress is not primarily due to the inadequacy of progressive efforts to promote positive change. We can be the change we want to see in the world, and we can try our best to encourage such change at the societal level, but the majority also has to come to the party if things are to get better for all the world's people.

I don't disagree with jrbarch that we can and should go within, and am open to the possibility that this is key to seeing through illusion, but a hungry person, or a sick or injured person, does not have much hope of achieving this before their basic needs and economic security are met.

Some Theory

For the economy as a whole, the total value, λ, produced over a period is equal to the sum of constant capital, c, variable capital, v, and surplus value, s:

c = the sum of value advanced to acquire the means of production used up in the period
v = the sum of value advanced to employ living labor
s = the value produced by living labor in excess of variable capital

Value and prices can be expressed in terms of money or labor time. It is always possible to switch from money terms to labor-time terms and back again using the 'monetary expression of labor time' (MELT). It will be assumed in the present discussion that the MELT is constant, with one hour of labor time producing $1 of value.

Marx argued that the value of constant capital is simply passed on to the value of output, whereas living labor, l = v + s, produces new value. If workers are required to work longer than is necessary to reproduce their own wages and benefits (v), there will be surplus value, s = l – v, left over for the capitalist class, prior to its distribution into retained profit, interest, rent, and so on.

These value relationships continue to hold at disaggregated levels of analysis. The value magnitudes applying to an individual sector, i, will be denoted c_i, v_i, s_i, and so on.

The value, λ_i, of sector i's output is equal to the amount of constant capital that is transferred to the final product(s) plus the living labor performed to produce it. For simplicity, it is assumed that all constant capital is used up – or transferred to final output – each period. More generally, only a portion of fixed capital will be passed on to the final output each period, so the simplifying assumption amounts to assuming there is no fixed capital, only circulating capital. Any machines and materials used will be completely consumed in the production period.

The value produced in sector i is:

λ_i = c_i + v_i + s_i

In aggregate, total value equals total price, but for individual sectors (or lower levels of disaggregation) prices will usually diverge from values. This can occur because of various influences, including monopoly, rent, and the tendency – when money capital is mobile – for the rates of profit in different sectors to equalize.

In the present discussion, competitive conditions will be assumed, so deviations of values from prices will be due to the last influence, the tendency for profit rates to converge. Investment dollars will flow out of less profitable sectors into more profitable ones, tending to push sectoral profit rates toward the economy-wide average.

The price received by sector i differs from value produced by an amount g_i, which may be positive or negative:

p_i = c_i + v_i + s_i + g_i

This divergence causes the sector's profit, π_i, to differ from its surplus value by the same amount g_i. That is, π_i = s_i + g_i. Profit refers to an amount received by the sector, whereas surplus value refers to an amount created in production:

π_i = p_i – (c_i + v_i)
s_i = λ_i – (c_i + v_i)

Sometimes the sum of constant capital and variable capital is referred to as the 'cost price', k_i.

Likewise, the sector's rate of profit received, r_i, differs from the rate of profit produced, σ_i. The first of these measures is known as the 'price rate of profit'. The second is the 'value rate of profit'. Under the assumption of no fixed capital, these are:

r_i = π_i / (c_i + v_i) = (s_i + g_i) / (c_i + v_i)

σ_i = s_i / (c_i + v_i)

Since, for the economy as a whole, total profit equals total surplus value, the sum of all g_i's is zero. This means that the economy-wide average price rate of profit, or simply average 'rate of profit', r, is equal to the average value rate of profit.

The g_i's that are consistent with all sectors receiving the average rate of profit can be determined by rearranging the second expression for r_i in the equations above, and substituting the average rate of profit, r, for r_i:

g_i = r(c_i + v_i) – s_i

Because of the aggregate identity between profit and surplus value, and the consequent identity between the average price and value rates of profit, the average rate of profit can be determined before any individual prices are known. The rate follows from a ratio of aggregate value magnitudes:

r = s / (c + v)

Temporal Determination of Values and Prices Within a Single System

In the TSSI, the values and prices of output in period t+1 are determined by price and value magnitudes of period t. The process is best described with matrix algebra, but can be kept very simple. It will not be necessary to do anything more complicated than multiplying or adding two matrices together, or subtracting one from the other. If any readers are unclear on these operations, they may wish to consult the short section, Basic Operations, in the Wikipedia entry on matrix algebra. Alternatively, readers can ignore the equations in what follows and focus on a simple numerical example provided in the next section.

Value magnitudes of all sectors will be represented by vectors or matrices that are denoted by bold font. For example, the vector c = [c₁ c₂ c₃] summarizes the constant capital of sectors 1, 2 and 3. Summing the elements of the vector gets us back to the aggregate value c for the economy as a whole. The aggregate, of course, is a single number, or 'scalar' in matrix algebra.

Recall that constant capital is the amount of money (or its labor-time equivalent) advanced for the means of production that are used up in production over the period. In the TSSI, this sum is equal to the period t prices of the means of production multiplied by their physical or real quantities:

c_t = p_t A

Here, p_t is a row vector and A is a square input-output matrix of physical quantities.

Similarly, variable capital is the amount paid to workers over the period, which can be considered equal to the prices of a real-wage basket, b, of consumer goods multiplied by the amount of employment:

v_t = p_t bl

Over time, A, b and l need not be constant, and so in general will also have time subscripts. For simplicity, it is assumed that these remain unchanged over the period.

Surplus value, as the excess of living labor over variable capital, can be written:

s_t = l – v_t = l – p_t bl

In the TSSI, the vector p_t is the set of prices prevailing at the moment when the means of production and labor power enter the production process. In the case of constant capital, these prices will be passed on to the final output. In the case of variable capital, the prices of the goods in the real-wage basket (or the 'means of subsistence') will help to determine the proportion of living labor that is necessary to reproduce the wages and benefits of the workers. This amount of labor is referred to as 'necessary labor'. The remainder – 'surplus labor' – creates surplus value.

Keeping in mind that the value of output in period t+1 is equal to the sum of constant capital, variable capital and surplus value in period t, the above expressions can be substituted:

λ_t+1 = p_t A + p_t bl + (l – p_t bl) = p_t A + l

Differences in period t+1 between sectoral output prices and values are described by the vector g_t. This enables output prices to be expressed as:

p_t+1 = p_t A + l + g_t = λ_t+1 + g_t

Notice that, in the TSSI, values and prices are mutually determined in a single system. On the one hand, the above expressions make clear that values in one period are determined partly by the previous period's prices. On the other hand, it was noted earlier that value magnitudes operating at the aggregate level are determinative of prices. Specifically, total surplus value divided by cost price (c + v) determines the average rate of profit that will apply in the determination of individual output prices. It is this prior aggregate determination of the rate of profit that enables determination of the g_i's and, therefore, individual prices.

Numerical Example

The following table shows the quantities of output from each of three sectors that are used as inputs in the various production processes:

The table indicates, for instance, that sector 1 uses 110 units of its own output from period t as input for production in period t+1. It also uses 40 units of sector 2's output and employs 60 units of labor over the period. This combination of means of production and living labor enables it to supply 225 units of output in period t+1.

The prices listed in the final row of the table are those that prevail at the time inputs enter production, which is defined to be the end of period t. The wage rate, w, is equal to half a unit of output produced in sector 2. Since the price of sector 2's output in period t is 1, this makes the wage rate 0.5 per unit of labor.

The output quantities for the three sectors in period t+1 will be x_1,t+1 = 225, x_2,t+1 = 200, and x_3,t+1 = 37.5.

The numbers in the input-output table can be used to calculate the values and prices that will prevail in period t+1 under the assumption that rates of profit are equalized across sectors. For instance, constant capital in sector 1 will be p₁(110) + p₂(40) and variable capital will be w(60). It is also assumed that the rate of exploitation, s/v, is 100%.

In sector 1, price exceeds value (225 > 210), profit exceeds surplus value (45 > 30), and the price rate of profit exceeds the value rate of profit (25% > 16.7%). The reason for this is that the composition of capital, c/v, in sector 1 is above the average (5 > 3). Investment will tend to be withdrawn or withheld from the sector sufficiently to cause the profit rate to converge on the average.

The reverse is the case in sector 3. Price magnitudes and profit rates in that sector are below their value counterparts as a result of a below-average composition of capital.

The remaining sector, sector 2, just happens to have a composition of capital equal to the aggregate composition of capital. For this reason, price and value coincides in that sector.

Notice, as anticipated, that the three aggregate identities hold. Total price equals total value, total profit equals total surplus value, and the average price rate of profit equals the average value rate of profit. With the average rate of profit determined at the aggregate level, individual prices then tend to move to the levels consistent with a uniform rate of profit across sectors.

Prices per unit of output can be calculated by dividing the sectoral prices by the physical quantities shown in the earlier, input-output table. For the first sector, the price per unit is 225/225 = 1, for the second sector 200/200 = 1, and for the third sector 75/37.5 = 2.

Although these prices for period t+1 equal the corresponding prices for period t, this need not be the case. Even without inflation, it is quite possible – in fact, likely – that the prices will change from one period to the next, due to changes in productivity. In the illustration, productivity has been treated as constant for simplicity. Inflation has also been assumed away, because it is not fundamental to the tendencies discussed.

The Same Example Using Matrix Algebra

Recall that constant capital can be calculated using period t prices and the input-output information:

c_t = p_t A

Here, A is a square input-output matrix with three rows and three columns. These dimensions are denoted 3x3. The element in row i and column j of the matrix is denoted a_ij and indicates the amount of sector i's output required by sector j for its production process. For instance, the first row of the matrix (shown below) says that 110 units of sector 1 output is required by the first sector, 80 units of sector 1 output is required by the second sector, and 10 units of sector 1 output are required by the third sector.

Similarly, variable capital and surplus value can be calculated using the appropriate vectors.

For those unfamiliar with matrix algebra, multiplication of two matrices is permissible if the number of columns of the left matrix equals the number of rows of the right matrix. If so, the resulting matrix will have the same number of rows as the left matrix and the same number of columns as the right matrix.

For instance, in the multiplication of p_t A above, the left matrix is 1x3 and the right matrix is 3x3. The "inside" dimensions (3 and 3) tell us that it is okay to multiply. The "outside" dimensions (1 and 3) tell us that the result will be a 1x3 matrix.

Each element of the resulting matrix is calculated by taking the 'inner product' (or 'sum product') of a row of the left matrix and column of the right matrix. The resulting element will be positioned in the same row as the left-matrix row, and the same column as the right-matrix column.

As an example, the inner product of the first row of p_t and the first column of A is 1(110) + 1(40) + 2(0). The result, 150, is in the first row and first column of the resulting matrix.

In the special case of multiplying a matrix by a single number (a 'scalar'), simply multiply each element of the matrix by the scalar. This is done in the second row of working above, where each row of a 1x3 vector is multiplied by 1/2.

Addition or subtraction of two matrices can occur when both matrices have the same dimensions. The resulting matrix will also share these dimensions. Simply add corresponding elements together to arrive at the corresponding cell in the resulting matrix. This occurs above in the third row of working.

Before calculating the values and prices for period t+1, it can be noted that, in aggregate, constant capital, variable capital and surplus value are 300, 100 and 100, respectively. These amounts are found by summing the elements of the relevant vectors.

The economy-wide, average rate of profit, r, is s/(c+v) or 25%.

This knowledge can be used to determine the price-value deviations.

Recalling that g_i = r(c_i + v_i) – s_i:

g₁ = 25%(150 + 30) – 30 = 15
g₂ = 25%(120 + 40) – 40 = 0
g₃ = 25%(30 + 30) – 30 = –15

As required, the price-value differences sum to zero.

It is now possible to calculate the output values and prices for period t+1.

 
 
 
 
 
 
 
 
Summing the elements of the period t+1 value and price vectors indicates that total value equals total price, as required.

Take yourselves as a case in point. I'm guessing you’re the kind of people who'd prefer to feel needed rather than expendable. Well, that kind of attitude won't do. Bosses want to keep your wages down, and that would be harder to do if you were given opportunities to make yourselves invaluable and near on irreplaceable. Bosses need to keep their options open in case some of you get ideas about better pay and conditions, or just generally become 'difficult' or, dare I say, 'bolshie'.

You know it's true. A boss needs to be able to dump you at the drop of a hat. Maybe it's to boost profits. Maybe it's to cut costs. Or maybe it's just because it feels good.

And a boss needs to be able to dump you without it having detrimental effects. There must be ready replacements, eager to crank it up, the moment you're out the door. And if morale suffers, because the buddies you left behind miss you, the boss will want to send them packing too, and bring in a fresh batch of wage-slaves.

Quite simply, there is little place for satisfying roles, the kind where you get to learn more and more interesting stuff over time. The only good on-the-job learning is no learning at all. Or, if you must learn, thirty minutes tops to master a dead-end role.

Although the point seems obvious, I don't believe it has been treated with the kind of gravity that only the economics blogosphere is fully equipped to deliver. It's high time the situation was spelled out in painstaking – okay, not painstaking – analytical terms. Then we can all lower our expectations and knuckle down to a lifetime of short-lived McJobs and frequent sackings. If we're lucky.

One way to characterize a job is by the learning that occurs in it. This can be described by a learning curve:

In the diagram, u(t) stands for the unit labor cost that a worker – let's say you – achieves at a given point in time, after you have built up an amount, t, of experience. It is how much you cost the employer per unit of output produced, at a given moment in time. We can call this the 'instantaneous unit labor cost', or sometimes just 'efficiency' for short. If learning occurs on the job, you get more and more efficient, and your unit labor cost falls over time. The curve is drawn assuming a particular wage level. If the wage increases, the curve will shift up.

On first being hired, you were green, and cost the bosses m + c per unit of output. Eventually, through learning on the job, you will get this down almost to m, which is your 'potential efficiency', given current pay and conditions. Some jobs will allow more learning than others, which will be reflected in the amount c, which is the 'scope for learning'.

Here is one possible algebraic representation of the learning curve:

 
 
 
 
 
 
The second term is the one that captures the learning process. When you just start the job, t = 0, and the second term equals c. Just as shown in the diagram, you cost the bosses m + c per unit of output. The longer you stay in the job, the larger t gets, and the closer the second term gets to zero, which it approaches asymptotically. Your unit labor cost converges on m, as indicated in the diagram.

The rate at which you reduce your unit labor cost from m + c down to m depends on how fast learning can take place on the job. The 'rate of learning' is represented by λ. When λ is large, the learning curve will be very steep initially, and almost all the learning will occur just after being hired. When λ takes intermediate values, the learning process is steadier and longer lasting, reflected in a more gradual curvature in u(t).

McJobs are those where learning is either nonexistent or extremely rapid but short-lived. If there is no learning, c = λ = 0 and the learning curve would just be a horizontal straight line showing a constant unit labor cost of m. Rapid but short-lived learning would mean the learning curve slopes down almost vertically until m is nearly reached, then stays almost flat after that. It would probably take most of us a half shift to master flipping burgers, but after that we'd have it down pat. Bosses love McJobs. They make us readily replaceable.

Satisfying jobs – let's call them 'good jobs' – will generally be ones where learning occurs at a steady pace more or less indefinitely, probably as part of a defined career path. Bosses would prefer not to offer these, and will always be looking for ways to deskill roles that, for now at least, need to allow workers greater autonomy, ingenuity, and scope for on-the-job learning.

Once you gain experience in a good job, you will soon become much more efficient in the role than an inexperienced replacement would be. This might remain true even if you happen to win a pay rise, work less hours, or start operating at a more leisurely – let's say human – pace. Any of these things would shift your learning curve up, because you would now have a higher unit labor cost at any given level of experience. Even so, you might still be more efficient than a prospective replacement.

In fact, let's say you do win a pay rise, plus a longer lunch break. Thanks to your experience on the job, you have realized that you can afford to be more bolshie. The boss knows that you can't be replaced without some cost, at least in the short term.

Your new situation is illustrated below. You have switched from your original learning curve, now called u₂, to a higher learning curve, u₁, after an amount τ of experience.

Incidentally, that greek letter tau is meant to look the same as the greek letter tau in the diagram. I have no idea why it doesn't match. Probably some bolshie worker at Microsoft is the culprit. Typical.

Anyway, you are sitting at point A and the boss is not happy, since before your improvements in pay and conditions, you were on a point almost directly below it on curve u₂. Extensions to the boss's country house are in jeopardy thanks to your militant demands for higher pay and a full half-hour for lunch.

As it happens, your immediate boss is sufficiently annoyed to call in his bosses. They're having a liquid lunch for the express purpose of dealing with the situation you've placed them in. They need to decide whether to kick your sorry butt out of the joint and find a replacement, somebody who will accept a lower wage and be subservient, like you used to be before you went all bolshie. The bosses want someone who is willing to be positioned on learning curve u₂. Unfortunately, such a worker would have no experience, so would be back at point E at time zero.

Algebraically, the two curves look like this:

 
 
 
 
 
 
 
The diagram shows that m₂ < m₁. This means that a replacement worker's potential efficiency would be superior to yours. It's also possible that a replacement worker would learn a bit faster, now that you are insisting on operating at less than sweatshop pace. This is reflected in the equation for u₂, where the rate of learning is vλ rather than λ, and v is assumed to be greater than 1.

Right at this moment, with the bosses plotting your downfall, you happen to have a lower instantaneous unit labor cost (at point A) than a replacement would have on first starting the job (at point E). But the bosses wonder whether, given enough time, a replacement would save the firm money and get the country house extensions back on track.

How patient are the bosses? In the diagram, they have a 'time horizon' of h. If a replacement would cost less over time period h than you would, the bosses will gleefully liberate themselves from your services. Given that amount of time, the replacement's experience on the job would increase from 0 to h. You've had a 'head start' of τ, so you would be able to build up your experience from τ to τ + h.

The bosses can see that the replacement would get down to point F after time h on the job, which represents a lower unit labor cost than you would offer them at point B. However, for much of the period, you would outperform the replacement. What matters to the bosses is the total accumulated costs over the entire period. In the diagram, if area ABCD is larger than area EFGH, you will be on your bike. Otherwise, you'll be safe, even though the bosses are itching to see the back of you.

It is self-evident that you are more likely to be fired the bigger the gaps in potential efficiency and scope for learning (the m's and c's), the larger the difference in learning rates (determined by v), and the longer the time horizon, h. On the other hand, the more experience, τ, you already have under your belt, the harder it will be for the bosses to get rid of you.

More interesting, though, is the influence of learning speed on the decision of the bosses. As indicated at the outset, bosses don't like jobs that provide an opportunity for indefinite learning at an intermediate rate.

We can see this by looking more closely at the areas ABCD and EFGH. Call the first area C₁. It represents your accumulated unit labor costs from time τ to τ + h. Similarly, the second area can be called C₂, and refers to the corresponding measure for a replacement worker employed from time zero to h.

Algebraically,

 
 
 
 
 
 
 
 
 
 
Let's define the 'firing payoff', Z, as:

 
 
 
 
This measures the cost savings the bosses stand to reap if you are fired and replaced by somebody else. If Z > 0, the firing payoff is positive and the bosses will replace you. Otherwise, you win out, even though you've become intolerably bolshie!

The behavior of the firing payoff, Z, as the rate of learning, λ, is varied is always the same. For very low and high rates of learning, it is more likely that firing will pay off for the bosses. But for intermediate rates of learning, there is a greater chance that you will survive. What qualifies as 'intermediate' values for the rate of learning varies with the choices for other parameters, but the pattern is always the same.

The following graph shows the firing payoff, Z, as a function of the rate of learning, λ, when it is assumed that m₁ = 100, m₂ = 75, c₁ = 200, c₂ = 150, τ = h = 1, and v = 4/3.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For λ < 0.6779, Z > 0, and you are fired. For λ > 4.3889, again Z > 0, and you are hanging out in soup kitchens. But there is a sweet spot. You get to stay in the job with your better pay and conditions in between those two cutoff points.

Fortunately, the bosses weren't the only ones able to zero in on the behavior of the firing payoff. Unbeknownst to them, you had already made the appropriate calculations before formulating your most recent demands for a pay rise and longer lunch break. You had the bosses right where you wanted them. They were screwed from the outset, and didn't even realize it. No wonder they would prefer to eradicate all the good jobs and leave us all fighting for scraps in McDonalds.

Extensions

I tried to keep the model as simple as possible without losing the key relationship between the firing payoff and the rate of learning. Various extensions are possible, but they only make the situation worse for the bosses when it comes to good jobs.

One obvious extension, though not very interesting, is simply to introduce a discount rate. If the bosses value cost reductions in the present more highly than cost reductions in the future, it is appropriate to include a positive discount rate. This doesn't alter anything much other than to make being bolshie even more likely to pay off.

Another extension is to take into account that the traits of the replacement worker are not completely known. The bosses will worry that a replacement will become bolshie, just like you did, before your removal has a chance to pay dividends. As with a positive discount rate, incomplete information concerning the traits of a replacement worker stack the odds more in favor of the incumbent.

The incompleteness of information adds an additional wrinkle, which is that now even large gaps between potential efficiencies will not necessarily hurt you as the incumbent. The reason is that there will now be a chance that the replacement will simply approach the same unit labor cost as you. Basically, for a big gap in potential efficiencies to matter, the probability of the replacement becoming bolshie can't be too high.

So, next time we hear people complaining about the crappiness of their jobs, we can sooth them with the knowledge that it is better for the bosses that we all remain unchallenged and expendable.

Background Reading

The idea for this post comes, in a roundabout way, from a 1981 paper by A. M. Spence entitled, 'The learning curve and competition', which was published in the Bell Journal of Economics. In the paper, Spence argues that early entrants into an industry will be more likely ultimately to dominate the market when production is subject to a learning curve.

The idea is also linked, again in a roundabout way, to a 1994 paper by Flora Gill entitled, 'Inequality and the Wheel of Fortune: Systemic Causes of Economic Deprivation', and published in Australian Economic Papers.

A different application of the argument presented here would be to consider the circumstances under which instances of bad luck in competition for employment could have long-lasting effects on the earnings of individual workers. Workers who luckily gain appointment into good jobs, perhaps initially contrary to merit, will get the opportunity to learn on the job and lock in their advantage, whereas unlucky workers consigned to bad jobs, again perhaps contrary to merit, might have a tough time reversing their fortunes.

I like the present application, though, in which capitalist deskilling emerges partly as a response to the effects on worker discipline that are potentially created by on-the-job learning.

In the earlier post, the markup, k, was defined as nominal income divided by the aggregate wage bill:

k = (W + U) / W = PY / W

where P is the price level, Y real income, PY nominal income, W the aggregate wage bill, and U gross profit. Clearly, the share of wages in nominal income, ω, is just the reciprocal of the markup:

ω = 1/k

In other words, an increase in the markup redistributes income from workers to capitalists.

Intuitively, it seems equally clear that workers' share in nominal income will be negatively affected if the prices of raw materials rise, since this will push up prices of finished consumer goods relative to wages. In considering distribution, Kalecki takes this additional factor into account.

In his analysis, he assumes that the prices of final goods produced in the dominant manufacturing and services industries are determined, at the micro level, in a different manner than prices of raw materials. He argues that the former are cost based, whereas the latter reflect demand conditions.

In manufacturing and services industries, Kalecki reasons that marginal cost tends to be constant over a fairly wide range of output below full capacity. He assumes that firms set prices as a markup over marginal cost, with the level of output being demand determined. The size of the markup in a given industry is argued to depend on market power, or the 'degree of monopoly'.

In contrast, the prices of raw materials are assumed to fluctuate positively with demand on the grounds that the supply of raw materials is relatively inelastic.

Although there are differences in the pricing theories of classical, Marxian, Post Keynesian, and Kaleckian economists, the various approaches are all broadly consistent with the notion of cost-based pricing in the dominant manufacturing and services sectors of the economy.

For example, in Marx, competitive conditions – defined as free mobility of money capital – would tend to equalize profit rates across sectors. This is because investment, in the absence of impediments, would be directed into those sectors offering the highest rates of return, the process continuing until prices had gravitated to levels consistent with normal profits. However, to the extent that some industries are monopolistic or oligopolistic, this tendency toward profit-rate equalization in Marx will be hindered in much the same way as a higher 'degree of monopoly' results in unequal profit rates in Kalecki's analysis.

Kalecki considers a broader definition of the markup than was employed above, which at the macro level he defines as the ratio of 'aggregate proceeds' to 'aggregate prime cost'. He can then relate both the markup and material costs to distribution.

Aggregate proceeds in Kalecki's analysis amount to 'value added' plus the cost of materials, M. Here, value added is identical to nominal income or nominal GDP, so aggregate proceeds total U + W + M. Aggregate prime cost is defined as wages plus the cost of materials, or W + M. Since the markup for Kalecki is the ratio of these two sums, we have:

k = (U + W + M) / (W + M)

It is simple enough to arrive at a relationship between this version of the markup and income distribution. Start by equating gross profit with itself and adding and subtracting prime cost to the right-hand side:

U = (U + W + M) – (W + M)

Strictly speaking, Kalecki separates out overheads, which include salaries of management, from the wage bill, since he considers these salaries more akin to profit. I am glossing over this by implicitly including those salaries in gross profit, U, rather than separating the left-hand side of the above identity into profit and overheads.

In the above expression, divide and multiply the first bracketed expression by prime cost:

U = [ (U + W + M) / (W + M) ] (W + M) – (W + M)

The fraction in square brackets is the markup, so we can write:

U = k (W + M) – (W + M) = (k – 1) (W + M)

Recalling that PY = W + U, we can substitute the above expression for U into the wage share out of income:

ω = W / PY = W / [ W + (k – 1) (W + M) ]

Finally, dividing the numerator and denominator of the right-hand side by the wage bill gives:

ω = 1 / [ 1 + (k – 1) (j + 1) ]

where j equals M/W, the ratio of material costs to wages.

This expression shows, as expected, that the workers' share in nominal income will be negatively related both to the markup and the ratio of material costs to wages. An increase in the prices of raw materials relative to the wage bill will cause the prices of final consumer goods to rise faster than wages.

Kalecki appealed to these relationships to argue that the wage share in nominal income will be broadly stable over the business cycle. His reasoning was that the 'degree of monopoly' would tend to increase in a downturn, raising the markup, k, and impacting negatively on the wage share. But, at the same time, prices of raw materials, being positively related to demand, would tend to fall in a downturn relative to wages, at least partially offsetting the effect of the larger markup on the wage share.

Brief Summary of the Positive Money Proposal

In a nutshell, the proposal calls for:

Debt-free new money. All money creation would be carried out by the central bank (Bank of England) crediting the Central Government Account. Such money would be non-repayable and so debt free. There would be no issuance of government debt, this being viewed as an unjustified positive return to riskless behavior. The government could then spend from its account in accordance with its socioeconomic program.

The amount of money creation. Although new money would be created by the Bank of England, the amount to be created would be determined by an independent Money Creation Committee rather than the government. The committee's criterion for determining monetary growth would be low and stable inflation, based on the current approach, but the elected government could change the criteria.

Interest rates. According to the proposal, the central bank, since it would not issue debt, would no longer set the rate of interest. All rates would be market determined.

Private banks. Private banks would no longer be allowed to create money but would still create loans for investment purposes. Rather than loans creating deposits, as is currently the case, the banks would only be allowed to lend money that had already been entrusted with them by savers willing for their funds to be used, for a specified period of time, for investment purposes. The person or institution providing the bank with funds would be able to specify in broad terms the type of investment activity it could be used for (e.g. for small business, renewable energy, mortgages, etc.). The private banks would be required – subject to a regulator's oversight – to indicate the level of risk as well as the rates of return that would be paid to a saver in the event of a successful investment and the proportion of the saver's money that would be returned in the event of failure such that both the bank and the positive-interest saver faced risk. There would be no bailouts.

Transaction Accounts. Savers who wished to avoid risk could instead opt for zero-interest Transaction Accounts, with payment services offered (e.g. cheque book, ATM, cash handling, etc.). Private banks would provide these services at a fee plus profit, with competition intended to limit the cost to savers. The Transaction Accounts would not be the liability of the private banks but instead be held with the Bank of England and guaranteed without limit. The private banks would merely be middlemen when it came to these accounts.

Further details can be found in the document, but the above brief overview hopefully provides sufficient context for discussion.

Remarks on the Proposal

In my view, the aim of debt-free money is a good one, but the particular form it would take under the proposal seems undesirable in key respects.

The biggest problem is the notion of an undemocratic, independent committee determining the government's capacity to create new money (create additional net financial assets, NFA). This in itself seems enough to make the system worse than the current one. At present, the central bank's independence is more appearance than reality. Whenever the central bank has a positive interest target, its actions are purely passive and therefore dictated by fiscal policy. Under present arrangements, central bank actions largely leave NFA unaltered, simply modifying their composition. To take the level of NFA injection out of democratic control would be highly undesirable.

There appear to be other problems as well. The automatic stabilizers would be compromised in downturns if the government could not make transfer payments until an undemocratic committee had its next monthly meeting to determine if such payments should be facilitated.

In terms of theory, advocates of the proposal appear to hold a monetarist belief that inflation is always and everywhere a monetary phenomenon, suggesting that controlling the money supply will control inflation. This ignores not only supply-side factors but the effects on demand of alterations in non-government net-saving intentions.

Personally, I very much like the aspect of the proposal that would eliminate government debt and deficits, because these terms are taken to be pejorative by many. But there is no need for this to be done in an undemocratic fashion. Either the government could direct the central bank -- if there is one -- to credit the government's account with the amount to be spent, or the government through its fiscal authority could spend new debt-free money into existence.

I also like the proposal's elimination of risk-free interest in the form of government debt or current accounts. There is no reason individuals should be receiving more money simply for already having some, and receiving even more, the more they already have. Retirement should be covered by a universal pension, paid through the issuance of new money. It would then be of little concern if savers could not fully preserve the real value of their savings in a risk-free manner.

Contrary to the proposal, I see little point in the private banks playing middlemen for a fee plus profit in the case of the guaranteed Transaction Accounts. These could just be administered by the central bank. There would then be no need for a profit margin.

Nor do I see value in the idea that banks should have to lend out of existing deposits. The current arrangement in which loans create deposits is flexible and reflects the fact that investment and other injections generate a corresponding level of leakages. This banking activity involves horizontal transactions and so does not in itself alter net financial assets. The government still retains control of NFA creation through its fiscal decisions.

This aspect of the proposal seems to be an attempt to get reality to resemble the loanable funds doctrine. It may also be motivated by a desire to give savers more power in determining interest rates, which would be highly undesirable. In this regard, it seems noteworthy that the Positive Money advocates want markets to determine interest rates. This, also, seems highly undesirable. For one thing, people wanting to take out mortgages for home loans would be at the mercy of savers when it came to the terms on which loans were granted.

The real question to me is not whether private banks should be allowed to create money through the lending process, but whether – and to what extent – there should be private banking at all. Nationalized banking, at least the nationalization of big banking, should be considered, in my opinion.

Nationalizing big banking would be a way of partially euthanizing financial rentiers. Interest payments on loans to corporations, once received by a nationalized bank, would function like a tax. The part of profit that would have gone to financial rentiers would instead be captured by the government. If desired, these funds could then be distributed as a dividend to citizens, in this way giving everybody a share in the rent. Alternatively, the interest payments could just be treated as destroyed money, which would provide more room for public spending in other areas.

A nationalized bank could also provide interest-free loans on low-cost housing below some threshold, if free low-cost housing for all who want it is not yet on the political horizon.

There could still be a significant role for a competitive sector of small private banks, although personally I would prefer local government to take over that role. I am not in favor of interest income on loans going into private hands.

Anyway, these are just intended as tentative -- and somewhat opinionated -- responses and policy suggestions. Hopefully they can prompt some discussion.

For those who have been trying not to pay attention, perhaps a brief summary of the situation is in order:

Unemployment, on last report, rose to a record 11.9 percent for the 17 nation Euro Area, and 10.8 percent for the 27 nation area. In Greece the most recent figure was 27.0 percent, Spain 26.2 percent, and Portugal 17.6 percent. Youth unemployment was 24.2 percent in the 17 nation area and 23.6 percent for the 27 nation area.

Apparently, the contractionary expansionists were slightly off in their estimates of the boom times austerity would deliver on the back of rising confidence and greater certainty.

Those unemployment figures suggest that income growth may not have been quite the mad gallop out of the gates that we had been led to expect. And so it turned out, with GDP declining -- rather than booming -- in the final quarter of 2012 at the rate of 0.6 percent. Powerhouse Germany, as it happens, performed right on that average.

Now, negative growth can't have been good for tax revenues, which probably meant that most governments were still in deficit, which suggests public debt must have risen further.

And if public debt rose alongside declining income, public debt as a percentage of GDP must also have increased, which it did, to 90 percent.

This virtuous circle of hardship and despair is encapsulated in a simple diagram that I believe is now taught to children in European primary schools as a kind of Euro pride building exercise.

In high school, I am told, they perform this in assembly as a chant. "Austerity, anyone?" ask the girls. "Yes. please," shout the boys. And so forth.

Then the school captain jots the following example on a whiteboard up the front of assembly:

"If the budget deficit is 50, income 1000, public debt 800, the expenditure multiplier 1.5, and the marginal propensity to tax 40 percent, will government spending cuts of 50 jeopardize the virtuous circle of hardship and despair?"

"No," shout the female prefects. "Income will fall by 75, the budget will still be in deficit by 30, and public debt will rise to 830!"

"Is it true?" asks the school captain.

"'Tis true!" shout the male prefects. "Public debt will rise from 80 percent of GDP to 89.7297 percent, rounded to four decimal places!"

"Hurrah!" shout the student body. "We can live out the virtuous circle of hardship and despair for another period!"

Private indebtedness, unlike government deficit expenditure, binds the majority of individuals more tightly to the wage labor relation. Workers with mortgages or other debt obligations will be more subservient in relation to their employers, and less likely to risk their present positions in negotiations over wages and conditions.

The neoliberal policies of deregulation, privatization, the user pays principle, and austerity all played their parts in weakening the position of the vast majority relative to capitalists and government, and pushing general populations into indebtedness. Labor-market deregulation assisted capitalists in the defeat of organized labor. Financial deregulation opened the way for credit-fueled private consumption, the real estate bubble, and interest and service charges for the rentiers. Privatization of public utilities brought declining standards, higher prices for essential services, and monopoly rents for owners. The user pays principle has been instrumental in the case of education. By loading students with debt, lifestyles other than wage slavery are deliberately made less viable. Rising university fees also ensure plenty of young people are desperate enough to join the military as a way of getting an education.

In all this, austerity plays a key role. It intentionally creates joblessness and precariousness for many. At the macro level, as Keynesian and Kaleckian approaches make clear, unemployment is a government policy choice, a choice that is activated by keeping the budget deficit at a level too small to eliminate the output gap. The result, again, is a more subservient general population.

The way the neoliberal policy agenda has been put into action is illuminated in an extraordinary feature-length documentary focusing on New Zealand. The documentary, which I have linked to previously, makes very clear that the neoliberal attack on workers' pay and conditions from the early 1980s onwards was highly orchestrated. The same basic experience has been mirrored in many places, but I have not seen the machinations stripped so bare as in this film.

The documentary traces several clearly defined steps that were followed by both major parties in tandem with the treasury and central bank.

First, austerity was consciously imposed to create mass unemployment. It is very noticeable in the early stages of the policy assault that protesting workers were most focused on the right to work. The government's implicit employer-of-last-resort role was being withdrawn, and this fact was obvious to protesters at the time.

Second, with unemployment much higher (deliberately so) than before, this was then used as "evidence" that wages were too high, legitimizing real cuts in pay, particularly in the minimum wage. Not surprisingly, the cuts in pay did not boost employment, since it is a fallacy of composition to expect otherwise, but this was never the intention of policymakers, as the documentary evidence makes clear.

Third, with unemployment still high and real wages reduced, it was argued that unemployment benefits must be too generous relative to the minimum wage, and this was the cause (via "disincentives to work") of the high unemployment. This is despite much of the protesting having initially been over the right to work.

The end result was mass unemployment alongside lower wages and a weaker safety net, precisely as intended. This led, predictably, to further wage and benefit cuts being demanded, in a supposed effort to reduce unemployment.

Current parallels in Europe are obvious. Austerity is demanded on the pretext of bringing public debt under control. This weakens demand, depresses income, and hits tax revenues. The result – intended all along – is that there is no improvement in the public debt position, which can then be used to legitimize further austerity to bring public debt under control. Stir and repeat. The process can recycle for as long as enough Europeans are prepared to go along with it.

The neoliberal policy agenda of deregulation, privatization, user pays, and austerity appears to be delivering beyond the wildest dreams of its adherents. In most parts of the world, there is mass unemployment, private indebtedness, and an ongoing massive upward redistribution of wealth that shows no signs of abating.

The neoliberals must think they're in heaven.

1. Profit Reflects Ownership, Not Productive Contribution

One idea threatening to orthodoxy is Marx's identification of living labor as the sole source of surplus value (profit). In Marx's theory, surplus labor is appropriated by the capitalist class, which includes capitalists and rentiers.

The significance of this is not that workers miss out on receiving all the value they create. What matters for living standards is the production of use values (real wealth), and these are produced not only by living labor but also by machines (dead labor), animals, and nature. The entire output of commodities is not solely due to the efforts of workers, so there is no suggestion that they are entitled to the entire output of the production process. (See, for example, the opening to Marx's Critique of the Gotha Program.)

The significance, rather, is that the capitalists' appropriation of – and control over – the social surplus, in the form of surplus value, is due solely to their ownership of society's means of production (the product of dead labor) and their private ownership and control of natural resources. Their claim over the social surplus is not due to any productive contribution they themselves make.

Marx's insight exposes capitalism as an undemocratic system of dependency. The majority, who lack access to means of production, are dependent on capitalists or capitalist governments for an opportunity to sell their labor power in exchange for a wage.

It is an indication of how mystified the process has become when welfare recipients can be widely derided by an ignorant public as succumbing to a culture of dependency. It reveals an unawareness that the entire system is one of dependency for almost everybody. Workers and their families are at the mercy of capitalists and capitalist governments for whatever employment or welfare crumbs come their way.

Denial of the real source of surplus value no doubt motivated the orthodoxy's attempt to explain income distribution in marginalist terms on the basis of relative factor prices. As is well known, this claim was discredited in the capital debates, an episode that the orthodoxy has tried hard to erase from history ever since.

It may seem strange today, but the capital debates played out in the most prominent journals, with Paul Samuelson, the leading neoclassical of his generation, ultimately conceding. The timing of this embarrassment for the orthodoxy seems interesting, to say the least, in view of the introduction, shortly after, of the pseudo Nobel Prize in economics, soon to be followed by the closing of ranks in academic hiring, and the refusal, from that point on, to publish heterodox work in the leading – neoclassical-controlled – journals. (For a polemical take on this history, see Nobel-nomics).

The most fundamental implication of the capital debates is that there is no basis for persisting with the fiction that income distribution is determined by 'marginal productivity'. This is consistent with Marx's position that profit reflects property rights predicated on the separation of workers – forcibly, initially, in most cases – from the means of production.

2. Capitalist Economies are Demand Constrained

The Keynesian or Kaleckian principle of effective demand may not seem quite such a hindrance to the orthodoxy's designs, but the motivation for its denial – at least in the long run – is still easy enough to perceive.

Recognition that a capitalist economy, under normal circumstances, is demand constrained would rule out the apologetic notion of a deregulated market economy's automatic tendency to full employment. In the neoclassical long run, this is meant to occur irrespective of demand or monetary factors via wage, price and interest-rate adjustments. Associated with this claim is the implication that a market economy tends to deliver equal opportunity for all.

In light of the Keynesian revolution, neoclassical economists adapted their position, distinguishing a 'short run', in which demand matters, from a long run in which it supposedly doesn't. They clung to the position that full employment would be delivered eventually, irrespective of demand or money.

This position, however, also hinges on arguments that were discredited in the capital debates. The orthodox claim amounts to viewing the macroeconomic outcome as predetermined, guaranteed through the operation of a price mechanism that will supposedly adjust aggregate demand to whatever potential output happens to be, reflecting real factors such as productivity, endowments, and preferences.

The claim is baseless. There is simply no reason to expect aggregate output to respond to relative price movements in a systematic way, and no such general tendency has been established in theory.

3. Money Matters, Including in the Long Run

Even more beyond the pale for the apologists is the audacity of those who subject money and the monetary system to scrutiny, whether it be the endogeneity of money or the implications of monetary sovereignty. (See here for an example of this taboo in operation.)

Money endogeneity refers to the capacity of private banks to determine the 'money supply' (usually defined, in this context, as demand deposits plus currency) as well as the essentially passive, accommodating role of the central bank. The latter can attempt to influence 'money demand' and the expansion of private credit indirectly through its choice of interest rate but cannot directly control the quantity of money in circulation.

An implication of this, in a deregulated environment, is that money expansion and contraction occur on the whims of capitalists and speculators, through their demand for loans, mediated by the risk-return assessments of the private bankers. The orthodoxy is not in any hurry to call attention to this aspect of the current institutional framework.

At the same time, a key implication of currency sovereignty is that the central bank can set the rate of interest as a matter of policy and government is in a position, if it so chooses, to enable activity of whatever kind is deemed appropriate, irrespective of the attitudes of private market participants and the invisible bond vigilantes.

This, for a different reason, is not something the orthodoxy wishes to highlight, because it is potentially a game changer. It makes full employment alongside low, stable inflation easily achievable through appropriate fiscal policy. But more disconcertingly for apologists, it makes possible any form of activity – including not-for-profit, not-for-growth, or communist – that society, through democratic means, might deem desirable.

This potential for democratized money is probably what has motivated attempts to put governments in a fiscal straitjacket, through the gold standard, Bretton Woods, currency boards, and the European common currency. It also motivates the currency issuer, in federal systems, giving non-sovereign states responsibilities that are disproportionate to their revenue-raising capacities and then deliberately restricting fiscal transfers.

It is believed that the message reproduced below was delivered in an ordinary middle-class suburb, scribbled on an otherwise conventionally completed ballot paper at the most recent general election. The pencil employed was HB, procured from a nearby stationery supply store and apparently smuggled in and out by the instigator. Be assured that the authorities are treating its implications with the utmost seriousness. Anti-terrorist units have been placed on alert, with nap time suspended until further notice.

"Parliamentary representative,

As you can see, you have secured my vote today, but allow me to indicate that it was a close call, and if you fail to lift your game in the following years, it may cross my mind not to vote for you, but somebody like you, at the next election. Thanks to you and your colleagues, my living standards have declined steadily, and the employment prospects of my children and, I suspect, their future children, are as remote as an unexplored rainforest on a drizzly, overcast day, which, I imagine, would be most days. Increasingly, I have little interest in community, my own future, or life in general.

And, yet, despite all your missteps in these directions, here I am, still alive, standing in not altogether decrepit condition in this voting booth, not so embittered as to be incapable of casting a vote in your favor. I do so in grudging acknowledgment that things might yet be worse under the governance of your opponent. There is still more that could be done to render my life, and the lives of those I still manage to care for, meaningless, and to deliver despair as total as it is permanent. I trust that you will refrain from doing these things all in one term. If so, I will acquiesce meekly to your whims, as I always have done, and as I always will do.

Even so, consider yourself on notice.

Sincerely,
Potentially swinging voter"