ArticleIP_1916.txt

   
   
      
         
            The Accidental Theorist

            Imagine an economy that
produces only two things: hot dogs and buns. Consumers in this economy insist
that every hot dog come with a bun, and vice versa. And labor is the only input
to production.

            OK, timeout. Before we go
any further, I need to ask what you think of an essay that begins this way.
Does it sound silly to you? Were you about to turn the virtual page, figuring
that this couldn't be about anything important?

            One of the points of this
column is to illustrate a paradox: You can't do serious economics unless you
are willing to be playful. Economic theory is not a collection of dictums laid
down by pompous authority figures. Mainly, it is a menagerie of thought
experiments--parables, if you like--that are intended to capture the logic of
economic processes in a simplified way. In the end, of course, ideas must be
tested against the facts. But even to know what facts are relevant, you must
play with those ideas in hypothetical settings. And I use the word "play"
advisedly: Innovative thinkers, in economics and other disciplines, often have
a pronounced whimsical streak.

            It so happens that I am
about to use my hot-dog-and-bun example to talk about technology, jobs, and the
future of capitalism. Readers who feel that big subjects can only be properly
addressed in big books--which present big ideas, using big words--will find my
intellectual style offensive. Such people imagine that when they write or quote
such books, they are being profound. But more often than not, they're being
profoundly foolish. And the best way to avoid such foolishness is to play
around with a thought experiment or two.

            So let's continue. Suppose
that our economy initially employs 120 million workers, which corresponds more
or less to full employment. It takes two person-days to produce either a hot
dog or a bun. (Hey, realism is not the point here.) Assuming that the economy
produces what consumers want, it must be producing 30 million hot dogs and 30
million buns each day; 60 million workers will be employed in each sector.

            Now,
suppose that improved technology allows a worker to produce a hot dog in one
day rather than two. And suppose that the economy makes use of this increased
productivity to increase consumption to 40 million hot dogs with buns a day.
This requires some reallocation of labor, with only 40 million workers now
producing hot dogs, 80 million producing buns.

            Then a famous journalist arrives on the scene. He takes a
look at recent history and declares that something terrible has happened:
Twenty million hot-dog jobs have been destroyed . When he looks deeper
into the matter, he discovers that the output of hot dogs has actually risen 33
percent, yet employment has declined 33 percent. He begins a two-year
research project, touring the globe as he talks with executives, government
officials, and labor leaders. The picture becomes increasingly clear to him:
Supply is growing at a breakneck pace, and there just isn't enough consumer
demand to go around. True, jobs are still being created in the bun sector; but
soon enough the technological revolution will destroy those jobs too. Global
capitalism, in short, is hurtling toward crisis. He writes up his alarming
conclusions in a 473-page book; full of startling facts about the changes
underway in technology and the global market; larded with phrases in Japanese,
German, Chinese, and even Malay; and punctuated with occasional barbed remarks
about the blinkered vision of conventional economists. The book is widely
acclaimed for its erudition and sophistication, and its author becomes a lion
of the talk-show circuit.

            Meanwhile, economists are a
bit bemused, because they can't quite understand his point. Yes, technological
change has led to a shift in the industrial structure of employment. But there
has been no net job loss; and there is no reason to expect such a loss in the
future. After all, suppose that productivity were to double in buns as well as
hot dogs. Why couldn't the economy simply take advantage of that higher
productivity to raise consumption to 60 million hot dogs with buns, employing
60 million workers in each sector?

            Or, to put
it a different way: Productivity growth in one sector can very easily reduce
employment in that sector . But to suppose that productivity growth
reduces employment in the economy as a whole is a very different matter.
In our hypothetical economy it is--or should be--obvious that reducing the
number of workers it takes to make a hot dog reduces the number of jobs in the
hot-dog sector but creates an equal number in the bun sector, and vice versa.
Of course, you would never learn that from talking to hot-dog producers, no
matter how many countries you visit; you might not even learn it from talking
to bun manufacturers. It is an insight that you can gain only by playing with
hypothetical economies--by engaging in thought experiments.

            
At this point, I imagine that readers have
three objections.

            First, isn't my thought
experiment too simple to tell us anything about the real world?

            No, not at all. For one
thing, if for "hot dogs" you substitute "manufactures" and for "buns" you
substitute "services," my story actually looks quite a lot like the history of
the U.S. economy over the past generation. Between 1970 and the present, the
economy's output of manufactures roughly doubled; but, because of increases in
productivity, employment actually declined slightly. The production of services
also roughly doubled--but there was little productivity improvement, and
employment grew by 90 percent. Overall, the U.S. economy added more than 45
million jobs. So in the real economy, as in the parable, productivity growth in
one sector seems to have led to job gains in the other.

            But there
is a deeper point: A simple story is not the same as a simplistic one. Even our
little parable reveals possibilities that no amount of investigative reporting
could uncover. It suggests, in particular, that what might seem to a naive
commentator like a natural conclusion--if productivity growth in the steel
industry reduces the number of jobs for steelworkers, then productivity growth
in the economy as a whole reduces employment in the economy as a whole--may
well involve a crucial fallacy of composition.

            But wait--what entitles me to assume that consumer demand
will rise enough to absorb all the additional production? One good answer is:
Why not? If production were to double, and all that production were to be sold,
then total income would double too; so why wouldn't consumption double? That
is, why should there be a shortfall in consumption merely because the economy
produces more?

            Here
again, however, there is a deeper answer. It is possible for economies
to suffer from an overall inadequacy of demand--recessions do happen. However,
such slumps are essentially monetary --they come about because people try
in the aggregate to hold more cash than there actually is in circulation. (That
insight is the essence of Keynesian economics.) And they can usually be cured
by issuing more money--full stop, end of story. An overall excess of production
capacity (compared to what?) has nothing at all to do with it.

            
Perhaps the biggest objection to my hot-dog
parable is that final bit about the famous journalist. Surely, no respected
figure would write a whole book on the world economy based on such a
transparent fallacy. And even if he did, nobody would take him seriously.

            But while the
hot-dog-and-bun economy is hypothetical, the journalist is not. Rolling
Stone reporter William B. Greider has just published a widely heralded new
book titled One World, Ready or Not: The Manic Logic of Global
Capitalism . And his book is exactly as I have described it: a massive,
panoramic description of the world economy, which piles fact upon fact (some of
the crucial facts turn out to be wrong, but that is another issue) in apparent
demonstration of the thesis that global supply is outrunning global demand.
Alas, all the facts are irrelevant to that thesis; for they amount to no more
than the demonstration that there are many industries in which growing
productivity and the entry of new producers has led to a loss of traditional
jobs--that is, that hot-dog production is up, but hot-dog employment is down.
Nobody, it seems, warned Greider that he needed to worry about fallacies of
composition, that the logic of the economy as a whole is not the same as the
logic of a single market.

            I think I
know what Greider would answer: that while I am talking mere theory, his
argument is based on the evidence. The fact, however, is that the U.S. economy
has added 45 million jobs over the past 25 years--far more jobs have been added
in the service sector than have been lost in manufacturing. Greider's view, if
I understand it, is that this is just a reprieve--that any day now, the whole
economy will start looking like the steel industry. But this is a purely
theoretical prediction. And Greider's theorizing is all the more speculative
and simplistic because he is an accidental theorist, a theorist despite
himself--because he and his unwary readers imagine that his conclusions simply
emerge from the facts, unaware that they are driven by implicit assumptions
that could not survive the light of day.

            Needless to say, I have little hope that the general
public, or even most intellectuals, will realize what a thoroughly silly book
Greider has written. After all, it looks anything but silly--it seems
knowledgeable and encyclopedic, and is written in a tone of high seriousness.
It strains credibility to assert the truth, which is that the main lesson one
really learns from those 473 pages is how easy it is for an intelligent,
earnest man to trip over his own intellectual shoelaces.

            Why did it
happen? Part of the answer is that Greider systematically cut himself off from
the kind of advice and criticism that could have saved him from himself. His
acknowledgements conspicuously do not include any competent economists--not a
surprising thing, one supposes, for a man who describes economics as "not
really a science so much as a value-laden form of prophecy." But I also suspect
that Greider is the victim of his own earnestness. He clearly takes his subject
(and himself) too seriously to play intellectual games. To test-drive an idea
with seemingly trivial thought experiments, with hypothetical stories about
simplified economies producing hot dogs and buns, would be beneath his dignity.
And it is precisely because he is so serious that his ideas are so foolish.