On the Market Evaluation of Productiveness

This is a brief follow-up to a couple of previous posts (here and here) that concern the market evaluation of social productiveness. In particular, it relates to frequent assertions, for example in the debate over the job guarantee, that private markets are better at evaluating social productiveness than alternative (e.g. democratic) mechanisms.

One example of what I am referring to occurs in John Carney’s recent critique of the job guarantee proposal:

The jobs created under the Job Guarantee are specifically not supposed to compete with the private sector, which means that they supply goods and services for which there is not a market demand. The total output of the economy might increase, but much of this output is non-productive—that is, it doesn’t actually improve our lives.

It is claimed that since there is no market demand, much of the activity would not be socially productive (would not “improve our lives”). In other words, there is a suggestion that social productiveness can only be reliably evaluated by private markets.

In an interesting discussion at Mike Norman Economics, I somewhat lowered the tone of the debate by posting the following:

Still waiting for a legitimate theoretical demonstration that private markets are good evaluators of social productiveness. The neoclassicals are the only ones to have made a serious attempt, and they abandoned the effort. The faith-based mantras continue regardless. Blind ideology, pure and simple.

The bluntness of my comment is unfortunate, but I think it is worth clarifying the argument, because there are specific points I have in mind when alleging that “a legitimate theoretical” demonstration is lacking and the argument amounts to “ideology”, even though this was probably not clear to readers of the comment.

When it is simply asserted that private markets do a good job of evaluating social productiveness, I take issue because the composition of demand (i.e. this is micro, not just macro) depends on the way income is distributed. This raises the question, is the distribution of income a good reflection of the spending power (dollar votes) different consumers ought to possess?

If the answer is no, why should we revere the market evaluation of productiveness?

If the answer is yes, what is the logic leading to this conclusion? It cannot be that market incomes reflect productive contribution. That claim is without legitimate theoretical foundation. We know this from the capital debates. Is the answer still yes?

If the answer is rather that it doesn’t matter whether the distribution of income is a good reflection of the spending power different consumers ought to have, what is the rationale for that position? Is it that, for better or worse, what’s done is done (distribution is what it is) and now all we can worry about is ensuring individuals can make their choices using the incomes they happen to possess? Or is it an entirely different rationale? If so, what is it?

The answer never seems to be spelled out by those attributing powers of evaluation to private markets. Until they articulate their position, I think it is accurate to categorize their assertions in favor of private markets as based on nothing but ideology.

Until the position is properly articulated, all the arguments about the government “interfering” with the market allocation of resources are beside the point. If markets are not necessarily a better evaluator of social productiveness, then “so what?” if its outcomes are altered?

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27 thoughts on “On the Market Evaluation of Productiveness

  1. “The total output of the economy might increase, but much of this output is non-productive—that is, it doesn’t actually improve our lives.”

    That line by John Carney again shows the obsession with first order spending.

    Is he then saying because the government caused the spending rather than the private sector what the hired employees spend their wages on has no value?

    As Bill Mitchell keeps saying they don’t care about where your money comes from when you visit the supermarket. A dollar is a dollar and a pound is a pound.

    So it’s completely wrong headed – because the alternative, unemployment, is paying people to do nothing.

    The argument always boils down to ‘we need to pay these people less so that I can have more’ – which is ultimately a crowding out argument.

  2. I think that private market “value” often runs up against a fallacy of composition too. Take advertising for example. Companies spend millions of dollars on advertising to maintain their market share. And if one company stops advertising they might lose millions in sales so the advertising is indisputably adding value for that company. But if I unilaterally extended the ban on cigarette advertising to, oh I don’t know, breakfast cereal, I’m pretty sure that people who like eating breakfast cereal would still go down to the supermarket and buy breakfast cereal. And in so far as they’re already buying the type of breakfast cereal that they find most delicious, the end result might be pretty much the status quo. So where exactly is the value of breakfast cereal advertising? Informational value I’d guess would be the answer, but I’m not sure I see the value in what essentially amounts to : “Corn Flakes, I’m Still Here”, “Corn Flakes, Don’t Forget About Me”, “What’s flaky and made of corn? That’s right, Corn Flakes”. I’m pretty sure cigarette smokers don’t just forget to buy smokes. I’m pretty sure they’re not paralysed by indecision now that the Marlboro Man can’t come into their lounge room and tell them what brand to buy. Private competition is great to force technical development and efficient usage of inputs to production. But people forget it also implies a massive amount of duplication of effort. Capitalism as the male peacock. Competition locks it into a race to grow the biggest tail despite the fact that practically speaking an enormous clumsy tail makes it less fit for survival.

  3. P.S. Didn’t mean to be offensive to those in the advertising industry. Just an easy example to take. I should have used the financial industry. How much human industry is wasted battling for financial returns that averaged out will always equal the growth rate of the economy as a whole?

  4. Good point, Neil. I very much agree with it.

    But Carney is also arguing that the JG will impede private firms when later, once the regular economy picks up, they find something profitable to do, because the JG workers won’t be compelled by necessity to take those jobs. The question I am raising in this post is, how can it be said that what the private firms have suddenly found worth doing is of more social benefit than the JG activities? There is a presumption, in such thinking, that profitability implies social productiveness. But profitability of particular activities depends on the pattern of demand, which in turn depends on income distribution. We know that it cannot be legitimately claimed that income distribution reflects productive contribution (capital debates), so why are we meant to care when some production does not reflect private market demand? This is what I think these critics need to articulate. At the moment, to me it just seems to be an ideological position.

    Likewise with the arguments about “incentives” for workers. The market signals are based on the composition of demand, and hence the distribution of income. So to the extent workers respond to market signals, they are not necessarily being prompted to throw their efforts into something that is more socially productive than what they would be doing in the JG program.

  5. jms: I agree that there are both macro and micro weaknesses in the arguments of the critics of the JG. One reason I highlighted a micro consideration in this post is that John Carney’s argument partly concerns individual “incentives”.

    I’m not personally in advertising, but no offense taken. 🙂

    (Besides, after my boondoggling post, I think just about anything goes …)

  6. I will be conservative and will not speak of productivity, but rather of overall output and social benefit as result of a job.

    Let’s compare, for instance, a research fellow for a Sydney conservative think tank with a nurse.

    This is a relevant think tank employment opportunity description:
    http://www.cis.org.au/about-cis/employment-opportunities

    As the page does not specify salary, let’s use salary figures for a comparable research fellow at UNSW (minimum yearly salary: $75,612; maximum: $100,119, plus extras)
    http://www.hr.unsw.edu.au/services/recruitment/jobs/16121106.html

    For simplicity, I’m leaving aside the extras (quite generous at UNSW).

    In order to be paid those salaries, a nurse with supervisory roles (5 days per week, 8 hours a day, 52 weeks) needs to be at least a Nursing Unit Manager – Level I.

    A Deputy Director of Nursing (450-750 beds hospital) earns about $100K a year.
    http://www.fairwork.gov.au/2008payscalesummaries/AN120387.pdf

    I’ll let readers value the output of the think tank research fellow as compared to the nurse’s.

    Notice that the case I am mentioning is not extreme: extreme cases are Wall Streeters who got their banks broke and still were paid bonuses. Here we are not talking about $100K.

  7. Let’s face it we’re all living off the productivity gains of the farmers and they can barely make a living these days. Should make anyone hesitate to claim the market gives you exactly what you deserve.

  8. I think you’ve misunderstood my argument.

    I was not claiming that only market processes can enrich our lives. In fact, I explicitly denied this point of view. To quote myself:

    “Now some people will say that this is fetishizing the market. Aren’t there things that improve our lives other than what the market will pay for? I don’t want to argue that there are not. I do not think, for instance, that these days we could pay for the Sistine Chapel but our lives are greatly improved by its existence. The problem is that there is no reason at all to think that people laboring in Job Guarantee positions will supply meaningful improvements rather than holes in the ground.”

    To put it more bluntly and lower the tone of discussion even further, I accuse you of employing a double standard. You see that the market is a flawed process for improving our lives but assume there is another unflawed process available to the state. I deny this assumption on the grounds that there is no evidence to support it.

    My point about the lack of demand for the products of the JG is related to inflation. The JG will increase aggregate demand without increasing aggregate supply of market demanded goods. This isn’t a judgment about the inherent worth of the the JG goods. It is a judgment about the inflationary tendency of the JG.

    Neil cites bill Mitchell as an authority on the idea that the JG products could very well be “in demand”–that is, add to aggregate supply of goods demanded by the market. Well, sure, that could happen. But that would simply be by luck. There’s no reason to suppose that JG jobs would necessarily produce goods demanded by the market and lots of reasons (see the socialist calculation debates) to suppose that they would not.

    What’s more, if the JG were producing goods demanded by the market they would almost certainly be competing with the private sector (unless you can think of some market failure according to which the private sector is refusing to produce goods for which there is demand). If your goal is simply replacing private sector jobs with more humane JG jobs, fine. Well done. This is not one of the stated goals of MMT, however. In fact, it’s explicitly denied by many.

    Paying people to do nothing seems incredibly stupid. But perhaps it is not, at least not under most normal circumstances. We know that we’ve be able to produce incredible prosperity under the system of providing funds to see people through temporary periods of unemployment.

  9. “But Carney is also arguing that the JG will impede private firms when later, once the regular economy picks up, they find something profitable to do, because the JG workers won’t be compelled by necessity to take those jobs”

    How can it impede private firms when all the private firm has to do is offer a better opportunity to the individual?

    And a firm offering a worse opportunity to an individual should not exist. Good riddance to them.

    JG isn’t just a price anchor. It’s a quality anchor as well. Activities qualitatively worse than the JG should not exist in a civilised society. It is either not done or replaced with a machine.

    I always find this objection from those who believe in the purity of markets confusing. How is competition for workers bad against an entity that is statutorily barred from price competing with you. Surely if you offer the same quality of work at a higher price you will win and the JG job will cease to exist.

    Production competing for workers is good, because that means workers will be replaced with machines that much faster for stuff that needs doing and fluff just won’t happen – conserving the resources for something more interesting.

  10. Is he then saying because the government caused the spending rather than the private sector what the hired employees spend their wages on has no value?

    I don’t think that’s his concern. But if that’s all the JG comes down too, the same effect would be accomplished by sending people checks without hiring them to do anything – a BIG.

    The question is what happens when they are hired to perform jobs. How do we organize the work? What kinds of work would they do? Is the work productive? How productive does it have to be to make it more worthwhile to hire people to do work than just to send them checks?

  11. John Carney, you wrote:

    You see that the market is a flawed process for improving our lives but assume there is another unflawed process available to the state.

    This is untrue. One of the motives for addressing employment through a JG rather than generalized government expenditure is to reduce the risk of cronyism. There is no blind faith in government nor private markets.

    My point about the lack of demand for the products of the JG is related to inflation. The JG will increase aggregate demand without increasing aggregate supply of market demanded goods.

    There will be a supply response if there is excess capacity and underemployment. Even if the unemployed were simply paid the JG wage to do nothing, production of the goods and services they demanded would expand in response through greater utilization of existing capacity.

    Paying people to do nothing seems incredibly stupid. But perhaps it is not, at least not under most normal circumstances. We know that we’ve be able to produce incredible prosperity under the system of providing funds to see people through temporary periods of unemployment.

    Here you are admitting that paying people, even to do nothing, is not necessarily problematic.

  12. Peter
    sorry it has nothing to do with this post
    but i’m trying to find out what MMT thinks about the consequences of fiscal deficits on the value of the currency in the forex market
    can u help me with some sources pls

  13. “The JG will increase aggregate demand without increasing aggregate supply of market demanded goods. This isn’t a judgment about the inherent worth of the the JG goods. It is a judgment about the inflationary tendency of the JG.”

    Those are the Cantillion effects and would apply just as much to endogenous expansion from the private sector from any investment funded with a bank loan. This is new spending and will not be productive initially either – and not at all in the case of most dot com bubble businesses for example.

    So should we ban expansionary money lending by banks to invest in businesses – because of the fear it is inflationary?

    No, because it isn’t inflationary and it can’t be with the JG anchor in place as I explained in my post. Price expansion is lethal with a wage anchor in place.

    There is nothing magical about expanding public spending. It is *exactly* the same as private sector spending with new money borrowed from a bank.

  14. “The question is what happens when they are hired to perform jobs. How do we organize the work? What kinds of work would they do? Is the work productive? How productive does it have to be to make it more worthwhile to hire people to do work than just to send them checks?”

    I’ve explained this Dan:

    – The state offers to pay the wages of any new position created in the voluntary and non-profit sector.
    – People will take that work if they want to.
    – That then shows that they can turn up and do work
    – Which reduces the risk to the private sector from hiring them.
    – Which then provides a tighter wage anchor than an unemployed buffer since substitution is more readily available.

    The JG jobs are then the ones that appear and disappear to maintain aggregate demand, and give people something to do with their time.

    As technology improves and the paradox of productivity becomes more and more obvious, we are going to have a crisis of ‘what do we do with ourselves’. Particularly in a system where we are trained from an early age to find value in work.

    Paying people off and washing your hands of the problem will lead to more social problems, and doesn’t reduce the hiring risk to the private sector. So BiG is essentially just increasing the amount of unemployment benefit.

  15. “But perhaps it is not, at least not under most normal circumstances. We know that we’ve be able to produce incredible prosperity under the system of providing funds to see people through temporary periods of unemployment.”

    We also created a reduction in the wage share, increased hours, increased number of people on the unemployment queue, and an increased number of people on long term unemployment.

    How much more evidence is required that it doesn’t work as advertised? Millions and millions of people suffer across the globe from this social exclusion.

    The private sector should be competing for staff with an alternative, or there is no market. Everybody should have the option of saying ‘no deal’.

    What’s wrong with the competition from a social job at a fixed price?

  16. Let’s propose something constructive and concrete.

    For what I’ve seen, those opposing a JG want jobs that (1) add real output to the economy, and (2) the market, in its infinite wisdom, has not covered. In that way, the JG does not compete with the market.

    That is an exceedingly hard task, but let me try. Oh, wait, somehow this reminds me of the definition of NGOs. Non-profit organizations ranging from Greenpeace and Medecins sans Frontiéres (MSF), through volunteer firefighters, Reporters without Borders, St. Vincent de Paul Society, Meals on Wheels and the Wayside Chapel in Sydney, fulfil those criteria.

    And this is how it works: you are a doctor/nurse who lost your job and are willing to work at the minimum wage, you contact MSF; they register as employer with the Commonwealth, the Federal Treasury pays your wages while you work for MSF.

    This could be extended to the Government (Federal, State and Local) and public universities and schools (non-profit): they are allocated, say, X JG-paid rank and file workers (cleaners, receptionists, gardeners, admin staff) and they (1) need to provide training to these workers, and (2) universities need to create a standard student placement so that a suitably qualified applicant will undertake studies also funded by JG, at JG wage.

    This scheme would explicitly exclude think-tanks and lobbyists, even though they are “non-profit”: their funding comes entirely from the private sector and, thus, their contribution to social well being is already factored.

    So, unfortunately, if one is an economist, one will have to clean the streets. They can also dig and fill up holes.

    There.

  17. John Carney wrote,

    “You see that the market is a flawed process for improving our lives but assume there is another unflawed process available to the state.“

    The democratic decision making process ? It’s not an unflawed process. Why does it have to be ? It’s a practical choice between two alternatives, not a utopian dream to create heaven on Earth.

  18. Magpie: Good comment. There are a lot of organizational structures already in place, as you point out.

    Luigi: The universities worked hard to banish courses in economic history from their degree structures, so I’m not in a position to comment. 🙂 (Actually, that is no excuse for me, as there was an economic history department where I studied at the time. I should have taken some of those subjects.)

  19. @ Luigi

    That PragCap piece certainly takes the quintessentially American view of economic history. It’s funny. I see a JG as something that tinkers at the edge of the present system. Cullen Roche obviously sees it as tearing up the fabric of American capitalism.

  20. Yes, there is a big hole in his analysis. What I don’t understand is their fear, I mean, they consider human being as an “animal spirit”, and that seems to be genetic or, at least, it’s genetic in the american society, so what’s the problem with your employed neighbour?

    I’ve read the entire discussion on billyblog etc etc, but peterc, in my view, has the best way to approach the issue. I don’t understand why in USA people call “socialism” or “big government” what doesn’t reflect their “way of life”. I don’t live in USA, there is really an american way of life? 300.000 people that think in the same way? This is Pol Pot!

    It remembers me Steve Jobs sanctification. And if you try to underline that he was really a great example of a “capitalist exploiter” in every sense, you are considered a demagogue. Work fetishists have managed to make a trivial matter every issue that discuss their particular ideas. So, every social aspect is marginale.

    Roche understand sectoral balances, so he can consider the american system (and others) like a zero-sum system. You have, for instance, Steve Jobs that counts 100 (you know, great ideas etc etc) and you have 100 people that work in really bad conditions to allow Steve Jobs to count 100. This is a great negative externality (I know, economists don’t consider that a negative externality) and this is what Roche calls the prosperous american economy. I call it the great prosperous outsourcing. I’m a demagogue, I know, but this is really how the system works and the way private market allocates resources. This is not a “evil capitalist argument”, this is how the system works. Thousands of examples. When Roche says:

    “The hundreds of billions of dollars Bill Gates and Warren Buffett have convinced themselves and their rich friends to give to charity?  ARRGGGG, THOSE GOD DAMN CAPITALISTS!”

    He is making a childish analysis. When he talks about charity, he reveals his way to approach the issue. He talks about the unemployment problem because it is a nuisance, not a social catastrophe. Economics become a rethoric exercise, then I prefer Sargent! The system works and the proof is Buffett charity. You note the conceptual oxymoron?

    Anyway, probably the more interesting critique is that made by Halevi and others. Wray and Mitchell reply in the paper Full Employment through Job Guarantee: A Response to Critics, but the answer doesn’t convince me completely. The balance of payment problem confuses me.

  21. John Carney: My point about the lack of demand for the products of the JG is related to inflation. The JG will increase aggregate demand without increasing aggregate supply of market demanded goods. This isn’t a judgment about the inherent worth of the the JG goods. It is a judgment about the inflationary tendency of the JG.

    I may be dense but I don’t get this. The US economy is a primarily service rather than a production economy. All the funds that flow through the service sector do not result in inflation even though no real goods are produced in the service sector. As far as I can see, the JG would slightly increase the service sector. I say “slightly, since if it were implemented as part of MMT macro policy based on sectoral balances and functional finance, then the residual of people involuntarily employed in the private sector would be contained even in downturns in the business cycle. Moreover, the financial cycle would be blunted by reforms such as Warren Mosler has proposed. What am I missing here?

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