If you think unemployment is bad, look at this

I spent most of Wednesday driving to New Jersey and back with some friends from college. After all the reminiscing and sharing of what's going on in our life, the unemployment rate came up, along with President Obama's State of the Union address. One of my friends observed that we accidentally had a serious conversation.

Purely as a joke, I made an off-the-cuff argument against using the unemployment rate, because it only counts current job seekers. It does not count, I told them in the driest tone I could muster, people who go back to school, become homemakers or just drop out of the job market. I recommended the labor force participation rate as a better figure to follow.

The words I was saying to sound far too serious accidentally came from the heart, I realized, and the conversation got me curious about what's been happening with the labor force participation rate.

What I found, sadly, was this:

President Obama started this year's State of the Union by saying unemployment is at a 5 year low. I believe him, but it appears that some of those improvements came from Americans leaving the workforce. That problem is getting worse every year.

This is not a criticism of any of the president's policies, but a crucial revision on his framing of the issue. While the unemployment rate has fallen, it hasn't fallen to an acceptable level. We also have a big problem when potential workers are left idle, even if there are less idle workers then there were before.

I do have one caveat here: My idea of an ideal future does have a lower labor force participation rate. I share John Maynard Keynes' vision of people living like lilies of the field, who toil not, neither do they spin. I want people to work few hours and retire earlier in life. However, that future comes from technological innovation, not a recession.

As it stands now, we aren't seeing a short-term drop in labor force participation because of labor-saving breakthroughs. It's because of poverty. The current course points us towards a stagnant or falling standard of living when what we want is progress and rising standards of living to occur while more people get to retire.
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The veil of money

One of the simplest ways to think of John Maynard Keynes revolutionary idea of increasing aggregate demand to end a recession is to forget about money and just think about people working and consuming.

Keynes rejected the classical idea that unwanted unemployment only came from two sources: Workers were unwilling to work for the wages offered and workers had trouble finding the jobs that were out there. He proposed the idea that there could be more unemployed workers than jobs available to them, and his solution was to have the government create more jobs for the unemployed.

That's the basics right there, with no calculations about money. I find this is an effective way to think about economics, as money brings needless complexity that confuses and intimidates people who are new to economics. Money is just a proxy for resources and my advice for novice economic thinkers is to strip away the veil of money and concentrate on the activities in the economy: What workers are doing, what technology is helping them along, how much they are consuming and how much they are producing.

I've long argued that Jared Diamond's Guns, Germs and Steel is a great place to start when thinking of how economies work. Diamond spoke of a primitive tribe where five people labor to feed five people and the tribe never advances. However, a tribe in a fertile land where four people can work to feed five people leaves that extra worker to build, research, invent or craft other things. Another society will have three people work to feed five people and see more advances. Our current society has gone very far on that same spectrum and needs two people to feed 100.

Sure, those 98 people who are not producing food need some way to get the other two to give them food. In modern times we recognize that that comes from money, credit, trade, sharing, charity and welfare payments, but those concepts are part of the veil that can be stripped away.

When trying to think about economies, try forgetting about money and many things will start to make sense. Conversely, needlessly including money can lead to many fallacies, such as the fabled free lunch myth.
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Keynes is a boss

My good friend and beloved econ sparring partner Dylan came up with the idea of reading John Maynard Keynes' General Theory and some of Hayek's writing so we can both learn more about how the other half lives.

I love this idea, and I hope it inspires Dylan to write in his blog again. I already had the book on my shelf and started reading it last night. I was immediately impressed with how bold Keynes' was in his first chapter, which consisted of a single paragraph saying that the purpose of the book is to overturn and replace the classical way of looking at economics, as the classic theory only applies to a special case. His final sentence read:

Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

Big words, and the truth is, the history of economic thought shows that Keynes was able to back them up.

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Strong start, weak finish

I was excited to when I stumbled across the BBC's Masters of Money miniseries that presented a trio of one-hour documentaries on economists John Maynard Keynes, Friedrich Hayek and Karl Marx, all available free online. Sadly, that enjoyment turned to annoyance and resentment when I watched the series and it unraveled from educational material into a slanted, ill-informed personal opinion piece.

I thoroughly enjoyed the first piece on John Maynard Keynes, which I felt was a celebration of his ideas wrapped in a detailed biography of his personal life. Keynes is a great subject and it's a shame his legacy hasn't soaked into the broader culture the way Albert Einstein's visage has extended beyond physics.

I anticipated a similar treatment of Friedrich Hayek, but never received it. Instead, I saw Hayek treated as a flawed extension of Keynes, the way Ptolemy would be presented in a documentary on Copernicus. What irked me the most is how they were shown as bitter rivals when in fact Keynes and Hayek became good friends despite being the leaders of opposing camps.

Host Stephanie Flanders really went off the deep end with the third piece on Karl Marx, who she gave way more credit than deserved. Flanders is hard to take seriously when she endorses Marx's criticism of capitalism. She does not endorse socialism or communism and the piece made a great point of showing that Marx never adequately fleshed those ideas out - something that irks the hollow-headed Stalinists of our generation. As Brad DeLong said, Marx's real contribution to economics was presenting the best arguments for modern mainstream economists to combat, not for advancing any sort of alternative.

The series constantly flouts The Open University tie in on the BBC website which promised several cartoon shorts on basic economic concepts. I thought most of them were garbled and visually ugly. Worse of all, the short on comparative advantage makes the cliche outsider argument that the concept is outdated and irrelevant, something Paul Krugman demonstrated has been happening for ages as a form of intellectual hipsterism.
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Milton Friedman goldmine

I just discovered the YouTube channel BasicEconomics. It has tons of original Milton Friedman lectures, including the question and answer sessions that followed, along with other videos that liberty intellectuals will love. This is right up there with LearnLiberty and FreedomChannel as an aggregator of free-market videos.

From Friedman's extended lectures I have already learned that Keynes' support of protectionist trade policies was a temporary political compromise, not a shift in understanding, and that my history textbooks butchered a great story about John D. Rockefeller.

Late in his life, Rockefeller had a clever response when people would walk up to him on the street and criticize his wealth. After they would say he should share it with the rest of the country, Rockefeller would ask them if they wanted to receive an equal share of what everyone would get if he split up his wealth. After they said yes, he would hand them a single dime.

My history book merely said that he would hand out dimes to people on the street. Friedman's version is an actual lesson, not a quirky anecdote.
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That's the cost of destruction, someone's got to lose

Dorian Electra, the same singer-songwriter who brought us I'm in Love with Friedrich Hayek last year has brought us a song about Keynes, and it's not a love letter.



This second song is a departure from the rap genre for Keynes vs. Hayek music and it may open the door for others. I'm waiting for Merle Hazzard to record a Marty Robbins-style gunfighter ballad between the two gentlemen from Europe.
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Economists as political villians

I've never gotten over how large a role economics plays in politics, and by that I mean, how large a role Do-It-Yourself Economics plays. Essentially, outsiders think they can guess their way to mastery of this strange and counter-intuitive body of knowledge. That explains why there's still a debate on things like free trade, despite the issue being as firmly entrenched among experts as Darwinian evolution.

What really makes my blood boil is when I see these guess-based economists dismissing important economic scientists for political reasons. I see some of my fellow right-wingers talk about John Maynard Keynes as if he was a bumbling fool, and denounce his General Theory. In reality, Keynes was an absolute genius who cast a shadow on the intellect of thinkers as brilliant as Bertrand Russell.

Some lefties have done the same thing with my hero, Milton Friedman. From disrupting his Nobel Prize ceremony to casting him as the villain in political books, lefty hacks have never understood the moral, gentle-natured man Friedman was, or how much good he's done for the world as an intellectual.

It's no secret that I reject Keynesian policies, but that's not the same as rejecting the entirety of Keynesian economics. There are actually two Keynes, as well as two Friedmans: They each had a scientific and political side, and they each made undeniable advances to economic science.

Political commentators may think of Keynesians and Friedmanites as warring parties, but actual economists like Greg Mankiw and Brad Delong are quick to cite both as major influences. Friedman himself spoke highly of Keynes and had no qualms about borrowing ideas from him.

I do want to caution that I do not extend the same courtesy to Karl Marx, who I insist was the Trofim Lysenko of economics. He did not contribute anything meaningful to economics and his influence has lead to inexcusable calamity. He made direct calls for violence and there's a reason his modern followers are on the fringe.

Economists are scientists, looking to learn more about the clockwork of our beautiful world. Sometimes their scientific conclusions lead them to support or oppose specific policies, and it's troubling to hear people claim that is a recipe for villainy. I do not accept all of Keynes's conclusions, but I would never go so far as to lump him in with the likes of Darth Vader, Adolf Hitler or Karl Marx.

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