Faking it

SUMMARY: Thanks to the election of President Trump and to his uncompromising attitude to the establishment media, much hot air is being expended on the subject of ‘fake news’. What we should really be getting worked up about is ‘fake economics’, for this is a much more pervasive evil, as well as a much more persistent one.

Thanks to the election of President Trump and to his uncompromising attitude to the establishment media, much hot air is being expended on the subject of ‘fake news’. Those being so exercised seem unable to stop and wonder when such news has NOT been, shall we say, ‘nuanced’. In Napoleon’s day, a well-worn figure of speech was ‘to lie like a bulletin’ while there was always much rather hollow hilarity in the West over the fact that one of the Soviet Union’s main organs of the press was call ‘Pravda’ or, in English, ‘The Truth’.

What we should, of course, be getting worked up about is ‘fake economics’, for this is a much more pervasive evil, as well as a much more persistent one.

One idea, currently doing the rounds among such ‘Fakers’, is that automation is about to throw everyone on the scrap heap and so we should tax the ‘robots’ and distribute the proceeds as a ‘universal income’ to the poor souls who can no longer find work in industrial drudgery as a result.

Ironically, Bill Gates is the latest to add his voice to this half-reasoned, Broken Window call – a man whose own entrepreneurial genius has spared us non-specialists more labour and meanwhile reduced the employment opportunities of more accountants, typists, publishers, graphic designers, and photographers than anyone in history!

If you really believe what you are saying, would you mind just writing us all a cheque now, Bill, to make up for all that lost income and we’ll call it square?

What none of those raising such a clamour seem to realize is that the ‘robots’ – and how conveniently sinister THAT term seems, with its echoes of every piece of dystopian science fiction from Frankenstein to Terminator and beyond – will only be installed if they allow more or better goods to be made at lower cost and that for their installers to enjoy a return, those goods have to be able to be sold at a price the masses – including the robotically-displaced masses – can subsequently afford to pay!

Another irony is that the very people who throw their hands up in despair at the demographers’ gloomy prognoses of a depopulated, greying humanity are largely to be identified among the congenital pessimists who fear that the imminent robot army might soon make-up for that self same projected lack of able-bodied factory hands and fresh-faced delivery boys!

We can keep going. Despite labour supposedly being both scarce (demographics) and superfluous (cybernetics), the cyclical voices of ill-omen are bewailing the fact that real wages are now falling as prices finally begin to respond to the monetary violence long inflicted upon the market mechanism by our current crop of ineffably Oz-like central bankers.

But, wait a minute. If we wish to stimulate more demand for a product, the usual trick is to make it cheaper. Reduce the price of shoes and people will not only buy more but may well increase the number or frequency of their purchases super-proportionally to the price reduction, so boosting the entrepreneur’s overall receipts and, hopefully, his profit (through spreading his fixed costs over more units, if in no other fashion).

There is no conceivable reason why the same argument should not apply to the product of human toil – i.e., to our labour. Make it cheaper and more should be demanded. Ergo, a lowering of real wages should act to encourage greater employment. While a possible source of hardship for the individual who is already securely in a job, the reduction represents a boon to the man or woman currently without one and so potentially acts to increase the total earned when all workers, new and old, are considered as a whole.

Indeed, so fundamental is this that neither Austrians nor Keynesians find much to disagree with here, their principal dispute being with regard to the way real wages should be adjusted to changing economic circumstances.

The Austrian – and, indeed, most of his Classical School counterparts – would let money wages fall in response to a bust, until the worker’s cost to his employer again becomes less than the estimated value of his product. The Keynesian, insisting that the man’s money wage is ‘sticky’ – and worried that wider risks exist within a chain of mutual obligations specified largely in nominal terms – would rather try to re-inflate prices, hoping that these will respond more rapidly than labour costs in the upward, as well as in the downward, direction.

In a world of high unemployment, then, falling real wages – or, more exactly, falling real wage rates – should be seen as part of the cure and not as a symptom of further decline.

As a practical instance of this, take the UK. While one may find much to criticise in the policies pursued in Britain by both the Treasury and the Bank of England in recent years, it is undeniably the case that the relatively rapid pace of price rises which has ensued, coupled with modest increases in money wages, has acted to expand employment greatly.

The official numbers show that, from their level at the peak of the boom, real weekly earnings fell 8.5% to their subsequent trough before staging a modest recovery over the past two years – albeit one which still leaves them 4.5% below their earlier maximum. Meanwhile, from its own 2011 low point, total employment has expanded by 3 million – or by almost 10% – while the proportion of the labour force in work has hit a high not seen in the 45 years such data have been collected.

The corollary to this has been that official measures of productivity have fallen, to the utter consternation of the punditocracy. Yet the effective substitution of cheap(ened) labour for relatively more expensive capital could not have been expected to do otherwise.

Once again, the inconsistency is striking. The constellation of low wages, more workers, and lesser per capita output is bemoaned by the same intellectuals who so fear a robot take-over that they dream of sending us serfs back to the fields in daylight hours, equipped only with sickles and wicker baskets, while mothballing the farmer’s air-conditioned, GPS-guided, round-the-clock combine harvester – all to our supposed benefit.

This is not to say that we do not wish for people only to find jobs which will not afford them a further improvement in their standard of living beyond that nonetheless important first one of moving back into gainful work from a period of enforced idleness. But, ultimately, the only way this can be done is by making their labour more productive of value. In turn, that can only be achieved by equipping them with a greater complement of the capital with which to magnify their input – with new robots, even.

It cannot be denied that this process may well displace many individuals and cause the winds of change to blow chill through many once thriving ‘company towns’. But to attempt to prevent its action is to bar the doors of progress firmly shut, to the detriment of everyone else.

A hundred years or so ago, the majority of jobs were agricultural: today, the US boasts less than a million such workers versus the 145 millions employed elsewhere. Similarly, one-third of all wages were earned in manufacturing as recently as the mid-50s: today the proportion is barely a tenth. Yet the richness, quality, variety, and reliability of the products to which these two ‘rumps’ give rise would be well beyond the imagination of their far more numerous predecessors.

For that we can thank the greater quotient of capital employed in all its constantly-evolving forms by the succession of mainly unsung entrepreneurs who have sought to make their own living – their profit – out of providing more and better goods at the lowest possible cost to the greatest number of us, their customers.

With this in mind, it should readily be grasped that though it can and sometimes does exert a certain palliative effect, renewed central bank inflation is far from being a certain remedy to the lingering ill-effects of a previous bout of central-bank endorsed inflation.

Far from it for, as the present malaise amply demonstrates, the suppression of market signals through interest rate and currency manipulation may inhibit both saving and the many potentially fruitful forms of investment to which such saving could be devoted. Fostered by central bank interference, debt-financed Consumerism has already intruded in many countries while a largely sterile speculation – whether in financial intangibles or the old mainstays, such as bricks and mortar – is everywhere a pervasive force.

Thus, the jobs we have added are all too often ones with limited capital endowment, a condition which means they are limited in their output; that they therefore command only low effective wages. It also means that a benign reduction in goods prices is largely denied us. As a corollary,  there is a far lesser provision of savings and, indeed, a higher inducement to run up new debts instead. Hence we see a greater proportion of more hand-to-mouth, short-cycle activity – of what we Austrians call ‘less roundabout’ methods of production.

In a less hampered market, all of that would mean higher natural interest rates, too. Alas, the toxic mix of fallacies at work in today’s dominant orthodoxy – the bastard offspring of the so-called ‘Phillips Curve’ and the productivity myth – has led our Nomenklatura to argue that this instead means that natural rates are low, even negative. This, in turn, only encourages them to maintain and even intensify the disparity they have brought about between imposed market rates and those which would be much more in harmony with the exigencies of societal time preference.

The longer that gap persists, the more the economic structure will be shaped by it and the greater the subsequent upheaval to be suffered should the forces which are being applied to maintain it ever falter or lose their potency. Perversely, the dim awareness that such a fate awaits us, if he were one day to desist, is the very thing which compels the Fake Economist as policy-maker to propel us further down the blind alley into which he and his peers have led us and so offers almost a guarantee that the risks confronting us rise and do not fall.

The Roman historian Suetonius tells us that during his rebuilding of the Capitol, the Emperor Vespasian was approached by an engineer who promised to transport the heavier columns for a much lower outlay of money and effort than had theretofore been possible. Vespasian – himself no stranger to money-making schemes – is said to have responded as what we might now call a patent-squatter, rewarding the man handsomely for his invention but refusing to use it, saying: ‘You must let me feed the poor commoners.’

It is sobering to think that today, almost two millennia later, our claque of Fake Economists would most heartily applaud.