||The Accidental Theorist
All work and no play makes William Greider a dull
By Paul Krugman
posted Thursday, Jan. 23; to be composted Thursday, Jan. 30)
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.
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
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
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.
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.
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
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.
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.
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.