Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

20 April 2018

How Dismal Is Economics Really?


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Introduction
1. The many faces of “labor”
2. The seamless web of science and technology
3. The absurdity of a “service economy”
Conclusion

Introduction

The great economist John Maynard Keynes is famous, in part, for having pronounced economics a “dismal science.” Today, it’s far more a quantitative science than it was in his day. We have infinitely more data and infinitely more ways to store and manipulate them. What a modern smart phone can do would have absolutely astonished Keynes.

But data by themselves are not the essence of science. As anyone who ever studied the “scientific method” knows, the essence is testing hypotheses. You form an hypothesis capable of being tested by observation or experiment. Then you do the observation or experiment and see whether the hypothesis holds up. That’s the essence of science.

If you subject modern economics to that test, it wins a few and loses a few. Take Communism, for example. At its core, it’s based on the notion that people will work hard for the “collective” or the state, like the horse in Animal Farm. Humanity put that notion to the test in two long-term fair trials: over seventy years in Russia and over thirty in China. It failed both times.

So Western economists concluded that real people will work for themselves and their families, but not for abstractions like the “collective” or the state. This conclusion led them to reject Communism almost unanimously.

It also led them to celebrate vociferously, because the people who paid their salaries (Western capitalists) didn’t much like Communism. As a science, economics began to seem less dismal. Even today economic hangers-on (namely, pols) continue to exhume Marx and Engels to shoot them down and re-inter them, just for the fun of it.

Then along came globalized free trade. Under this theory, people and nations make what they are best at making, and free trade among them makes everyone better off.

A rapidly developing China glommed onto this theory in 1978, when Deng Xiaoping came to power. It decided it could make lots of things better than “developed” nations because it had lots of people who were willing to work harder for less money, and under far worse conditions, than workers in developed nations.

For forty years the theory seemed to work. Chinese workers and Chinese got richer. The Chinese bought up over seven percent of our treasury bills, making China one of our biggest creditors. Nearly a billion people rose out of extreme poverty, mostly in China. Much the same thing happened in once-Communist Eastern Europe, as it rose (more slowly) from Communism and became part of the EU.

But a funny thing happened in the developed nations. They lost manufacturing jobs and factories, big time. Manufacturing towns dried up and blew away. So millions of their workers rebelled. They began to agitate and vote against globalized free trade.

Workers in Britain voted to “Brexit” the EU—the most modern embodiment of globalized free trade. American workers elected a complete political ingenue named Donald Trump, who started to impose (gasp!) tariffs to keep what was left of American manufacturing from drifting offshore, too.

Not only that. Heretofore nice, sensible workers in all these countries turned against immigration and immigrants, including genuine refugees. They turned to racism, xenophobia and other forms of bigotry and tribalism. Their politics, inexplicably, began to look like the fascism and nativism that almost all educated people agree had caused humanity’s most horrible and senseless war in the last century.

So what did economic “scientists” do? Did they question their hypothesis that globalized free trade makes everyone better off? Not on your life! Instead, they stuck to their guns, theoretically speaking. Their collective “reasoned” conclusion was that “the lab rats went mad!”

Now suppose a pharmaceutical firm reacted to a failed drug trial by saying, “the lab rats went mad!” What do you suppose would happen to its stock price and its business leaders? Where would they be now?

Yet nothing similar has happened to our free-trade economists. Why? Because they had a lot of (mostly undeserved) prestige and credence, but they really hadn’t much responsibility at all. They were handmaidens to the capitalists, who were getting rich quick by shipping Western factories to low-wage countries and profiting from price arbitrage. And the global free-trading capitalists wanted the big party they had started to continue. They still do.

Everybody who mattered seemed to be happy. London became an international center for banking and shuffling paper. Everyone who had money, including bent and exiled Russian oligarchs, was buying big flats in Knightsbridge and Kensington. Nobody much cared that the workers in Glagow, Birmingham and Blackpool didn’t have jobs and that the council flats they live in were getting shabbier by the day.

The great theory of globalized free trade continued to make the bankers, capitalists and shareholders who practiced it rich. The theory only seemed to disadvantage people who had lost their good jobs and their unions and therefore had no economic or political leverage. They didn’t much matter, at least until they elected Donald Trump and voted for Brexit.

This essay, in contrast, proceeds on the basis of the scientific method. When an ostensibly scientific hypothesis fails as spectacularly as has the one that says globalized free trade makes everyone better off, you re-examine the hypothesis and your theory. You don’t just claim “the lab rats went mad!” they way Marie Antionette once advised “Let them eat cake!” You don’t, that is, unless you want Keynes to rise from the grave and point his bony finger at his nascent science once again.

As it turns out, a quick glance at the theory reveals some grossly neglected variables. Among them are aspects of society, and of science and technology, that make productive enterprises work, at least in modern, specialized societies. Once you take these features of modern real economies into account, the modern theory of globalized free trade begins to look a lot like Swiss cheese. Let’s take a look.

1. The many faces of “labor.”

Classical economics says there are three factors of production: land, labor and capital. It treats them as pure variables, expressed in abstract form as pure numbers.

But only capital (money) really is a simple abstraction. Money is fungible, at least in a free market, and most free markets work that way to a reasonable approximation.

Land and labor are different. Even the law understands that land is unique: no two pieces are alike. Some land is arable; some land is wild. Some land is valuable because it’s near a highway, railroad or airport and can bear valuable commercial traffic. That’s why, if you agree to sell a parcel of land and renege, the law can force you to sell that particular parcel and no other.

Labor is even more complex because it’s a product of people. My labor is not the same as yours. My law degree and physics doctorate aren’t much good in farming, nor in practicing medicine. They’re not bad in helping me understand how societies and things that run work.

Labor depends on the person doing it, his or her capacity, intelligence, education and training. The process of labor also interacts with all these traits: people get smarter as they work on a particular task, whether or not their training is formal and produces a diploma or degree.

The point here is that workers are not automatons or fungible, no matter how simple the work they do may seem. They are people embedded in a society. Their work is part of that society; the more complex and specialized it is, the more it partakes of and depends on aspects of their society not directly related to the work itself.

Not only does the work they do affect their families and that society (as we now know after watching millions scream in frustration). It and their education and training are part of the seamless web of science and technology, which we’ll get to later.

As Chinese workers began to make stuff for America and Europe, they began to climb the learning curve of manufacturing. They learned about machines, materials, processes and organization. The learned about the Bessemer converter that makes steel and its modern counterparts. They learned about Henry Ford’s assembly line and the modern computers, robots and sensors that make it work much faster and better today, a century later.

The Americans whose jobs the Chinese replaced stopped doing these things. They stopped improving American steel-making machines and assembly lines bit by bit and step by step. Out of necessity, to support their families, they turned to greeting customers at Wal-Mart, pumping gas, and frying hamburgers. And they began to forget the million tricks and twists of making what they used to make, and making it better, quicker and cheaper, step by step, every day.

If you like, you can consider the workers and their daily training and education to be part of the product, or at least a part of its manufacturing infrastructure. You can consider their knowledge and skill part of America’s “know how,” or “trade secrets.”

All this may not seem like much of a big deal in making lawn furniture and hand tools (the first products that went to China). But the more complex and higher-tech the products, the more the people matter. When talk turns to making smart phones or DNA sequencing machines, workers’ training and experience matter. They may not matter for every worker, but they matter for the workers who count. They matter so much that capitalists try to protect this stuff as “intellectual property,” by patenting it, keeping it as a bunch of “trade secrets,” or, for sensitive things related to military matters or intelligence, keeping it as “state secrets.”

So taking work offshore does a lot more than move a mere pure, abstract “factor of production.” It takes training, experience, education and the need for it offshore, too. It neglects “intellectual property” and “know how” and lets them languish and decline at home, or enrich foreign manufacturing venues. It lets the domestic “infrastructure” of manufacturing, including the people who do it, decay.

Land can act similarly. According to a recent news feature on PBS. , India is implementing a massive land-reclamation project to re-hydrate and repurpose rural land. Why? It thinks that so much land has fallen fallow that it might not be able to feed itself. By making sure that its arable land is hydrated, and properly tended, at least seasonally, India can offer rural livelihoods to people who prefer to live in the countryside and better feed its teeming cities. Thinking of land as fungible, like capital or brokerage accounts in computers, just doesn’t seem to work.

2. The seamless web of science and technology.

There is one thing that everyone who had ever worked in a physics laboratory or advanced machine shop knows that few economists (as such) appear to understand. Science and technology form a seamless web. They feed upon themselves. They are a bit like ecology: everything is connected to everything else.

Let’s just take a single industry—one of our species’ proudest achievements: aircraft and air travel. You couldn’t have modern air travel without directional radio and radar. In fact, in a famous accident in the 1940s, an airliner in South America disappeared in a long-unsolved crash because we then lacked the technology to understand and predict how the jet stream held it back in passing the summit of a mountain range.

You also couldn’t have modern jet aircraft without modern materials and metal alloys. Just days ago (as I write this) a Southwest Airlines passenger died when an aircraft engine exploded in flight, likely due to metal fatigue. Assessing metal fatigue in aircraft engines requires diagnostic techniques as varied as ultrasound and X-rays.

Next take modern genomic medicine. Not only does it require the chemicals and electronics of DNA sequencers. It requires all the chemical laboratories and sophisticated integrated-circuit equipment to amplify DNA and sequence it.

I could go on and on, but you get the idea. In modern industry, you can never tell in advance what sophisticated aspect of science or technology will permit or facilitate development of a new product or service. You can never tell what obscure branch of achievement or technology will provide the “missing link” that makes a long-sought product work. Only the nation that keeps its fingers in all the pies will have the flexibility and versatility to make new things cheaply, quickly and well. The nation that has the broadest base in science and technology will excel in innovation.

Recently the Trump Administration has become concerned with so-called “strategic” manufacturing. To judge from news articles, that includes things like steel (required for virtually all heavy construction), aluminum (required for aircraft) and advanced communication gear.

But trying to list what’s “strategic” and what’s not is a fool’s errand. In this complex world, one never knows what product or technology will be essential to the next step toward a genomic cure for cancer or in a spaceship aiming for the stars. To think otherwise is to misunderstand how science and technology advance.

Of course lawn furniture and hand tools—the things whose making China took over first—are not terribly strategic. But today, when China is capable of taking over making iPhones, solar panels, advanced machine tools, electric cars, and heavy machinery, its doing so completely would deprive our remaining workers of the training, education and practical experience that they need to succeed, let alone excel, in vast swaths of technology. While one cannot predict in advance the exact ways in which this loss would impair our manufacturing capability and our ability to innovate, we can be sure it will have considerable effect.

This point is so important, and so fundamental to basic flaws in the current theory of globalized free trade, that I feel compelled to cite two lengthy examples to drive it home in all its truth and many ramifications. The examples involve two of the greatest achievements of our human species: nuclear weapons and safe, reliable air travel. Let’s take a look.

    a. Nuclear weapons.
Since 1945, when World War II ended with the United States’ first use of nuclear weapons, their basic mode of operation has been an open secret, revealed repeatedly by news reporters and popularizers of science. First you take critical masses of fissionable material, either Uranium-235 or Plutonium. You get the fissionable Uranium by refining and enriching it in centrifuges, or you generate the Plutonium in a nuclear reactor. Then you cut the more-than-critical mass of fissionable metal apart into pieces. You shape the pieces carefully and place conventional high explosives symmetrically around them, so that a critically timed explosion will implode them, instantaneously, into a more-than-critical mass.

Voilá! You have an atomic bomb! In broad principle, it’s that simple.

But if nuclear weapons are so simple, why doesn’t every nation have them? The United States developed them in about four years, in the middle of humanity’s most dreadful war, while fighting that war on two fronts, with all the resources of its entire society. Surely in the intervening 73 years, other nations could have accomplished the same feat, starting from scratch on their own, just as the United States did. Surely their development would have been much easier in peacetime, without enemies and spies breathing down their necks. So why doesn’t every nation, or at least every nation with a decent industrial infrastructure, have nukes?

The answer is that making them is not really so simple at all. The basic outline is simple, but the devil was and is in the details. And getting the details right required organizing the greatest and most sophisticated military-industrial project in human history, our so-called “Manhattan Project.”

Let’s start with the people. Nuclear physics was a European invention. Virtually all the great physicists of the early twentieth century were Europeans: Brits, French, Germans, Italians, and a Czech or Hungarian or two.

The United States had been a backwater of physics before Hitler and his Nazis came along. But Hitler and his Nazis scared the Hell out of all intellectuals, especially those introverted scientists who spent their lives studying particles too small to see with even (then) the best microscopes. So as Hitler’s armies conquered Europe, all of Europe’s best physicists fled to the United States. Inadvertently, Hitler let us collect the world’s best minds, most capable of making atomic weapons, right here in our own country.

But that’s not all. These foreign scientists, nearly all of whom spoke with accents, included Italians and Jews. They were not exactly popular minorities: anti-Semitism was on the rise here in the US, as in Europe, and Italian Catholics still had not achieved full acceptance as Americans. Yet somehow FDR’s administration had men smart enough to ignore these scientists’ foreign and ethnic origins, organize them and their few American counterparts into a team, accept their strange ideas and untested theories, and put the military and industrial resources of a great nation at their disposal.

Three facts suggest the extent to which the “Manhattan Project’s” team had to invent its way to new technology, i.e., build an entirely new technological infrastructure, in order to develop the first atomic weapons. First, at one point, the Manhattan Project comandeered almost ten percent of the entire nation’s electrical energy, in order to turn the centrifuges to enrich the uranium that went into the first nuclear weapon.

Think about that. One-tenth of the nation’s entire electrical output! Somehow, the rich, the powerful, the industrialists—even the humming war factories—had to skimp on power so that the centrifuges could turn. Probably only an enlightened democracy, with those at the top fully aware of the stakes and the tradeoffs, could have achieved such a diversion of energy for long enough to do the job.

The second suggestive fact involved the invention of teflon. As scientists began to experiment with centrifuges to enrich uranium, they discovered that the Uranium hexafluoride gas that they enriched was not only highly toxic, but highly corrosive. It would burn out thick stainless-steel centrifuge tubing in mere hours or days.

For a time, much of the nation’s scientific and technical talent devoted itself to solving this corrosion problem. Eventually, chemists working with the physicists solved it by inventing a plastic-like coating made of teflon (tetrafluoroethylene), which they used to coat the tubes to reduce corrosion. The coating worked because it had lots of bonds with the very fluorine atoms that made the uranium gas so corrosive.

Today, of course, everyone knows about teflon because we all use teflon-coated non-stick pots and pans. (Teflon has a high melting and degrading temperature, well above normal cooking range.) The scientists working on the Manhattan Project had to create this whole new industry, with a whole new plastic-like material, just to solve a single technical problem on the way to developing nuclear weapons.

The third fact relevant to this discussion involved triggering the conventional explosives. The triggering had to be exact, so that the propagation of the explosive waves through the solid, fissionable metal caused instantaneous compression at enormous pressure. Everything had to work within microseconds, at a time when transistors, integrated circuits and even digital computers had not yet been invented.

Physicists knew good techniques better than others, because in past decades they had done many experiments testing the speed of light in various media. They knew how fast light travels in various transparent media, and how fast electrical signals travel in various conducting and semiconducting metals. Putting this detailed knowledge together with knowledge of how fast high-explosive shock-waves travel, they were able to design atomic-weapon triggering devices that worked the first time. The Soviets were not so clever; they had to steal our trigger design through the Rosenbergs, who were executed for espionage, in order to design their first atomic weapons.

Today, of course, we do have transistors, integrated circuits and digital computers. We even have digital computers with cycle times measured in picoseconds (millionths of a millionth of a second). So today a lot of our design of atomic-weapon triggering devices can be done “virtually,” i.e., in computers rather than in the laboratory. Computers can even keep track of how our high-explosives deteriorate with time and tell us when we have to replace or repair components in order to be sure that our nukes will work when required and not go off prematurely or accidentally.

Of course all this continual study, advancement and maintenance requires a huge organization of highly-skilled scientists, technicians, machinists, and computer programmers. It’s all part of our secret military-industrial complex, and it’s not about to be let go.

But suppose it were a mere industrial/commercial project. Suppose some manager decided, in order to save money, to let this work be done offshore. Who in America would maintain the test equipment, the manufacturing lines, the computers, and the programs needed to maintain and test, let alone improve, all this infrastructure over the years? Who would have been able to use, test, improve and rewrite the computer programs, as new and more powerful computers and programming languages replaced the ones used to write them? Wouldn’t our ability to have, maintain, and improve our nuclear arsenal fade away as all this technological infrastructure moved offshore?

    b. Jet engines.
We all take jet engines for granted as we fly fearlessly on jet aircraft day after day. But in fact, jet engines are one of the greatest marvels of modern technology.

If you sit near an engine on an aircraft, your head is mere meters from exotic metals like titanium and vanadium, whirling away at tens of thousands of revolutions per minute, at temperatures comparable to those in the blast furnaces that make steel. All this is happening just meters from your head; yet you sit there in perfect safety and comfort, while streams of red-hot fuel and air force your plane on its way with thrust forces equivalent to the weight of a tractor and semi-trailer on the highway.

Like the principles of nuclear weapons, those of jet engines are simple enough. A heated fuel-air mixture ignites while put under immense dynamic pressure by turbine fans, and the forward thrust of that pressure on the fan blades moves the engine and the plane forward, while the unrestrained exhaust blows out the rear.

But problems quickly become complex when the jet engine meets the real world. Not only must the blades and system function through the icy cold of high altitudes, polar vortices, snow, rain and fog. The blades themselves must continue to work, and not fly apart, after harsh encounters with snow, ice and flying creatures. Engineers used to test new jet engines, I have been told, by throwing supermarket chickens into the engine intakes and seeing what happened.

Often we first become aware of the complexity of our technology when it fails. Recently a Southwest Airlines jet engine failed on a passenger route, killing a passenger who was nearly sucked out of the cabin through a breach. The exploding engine parts did not kill her directly, only indirectly through the breach. But the speeding fan-blade fragments could have sliced through her chest far more easily than through the cabin’s superstructure and aluminum skin.

In fact there had been another, similar engine failure a couple of years before, one in which fortunately there had been no injury. But these two events scream the need for more careful assessment of fan-blade deterioration and maintenance. As jet engines get older and older, the question of metal fatigue raises its ugly head, just as it did in the spontaneous cabin ruptures that occurred (and that were later solved by monitoring metal fatigue) in the 1980s and 1990s.

To avoid metal fatigue as engines encounter longer and longer useful lives, engineers will have to find ways to test fan blades periodically. And since metal fatigue can escape visual detection, they will have to use more sophisticated inspection techniques, such as ultrasound, x-rays, other irradiation, or electronic probing. These techniques will then become part of the “know-how” of jet engine manufacture and maintenance, perhaps patented but more likely kept as secret lore.

During my days of travel to my teaching assignment in Akron, Ohio, I had a chance to become acquainted with a retired General Electric engineer who had worked most of his career on jet engines. He was still working as a consultant occasionally, on assignment, often in foreign countries, decades after retirement. One thing he worked on, he told me, was clever techniques for balancing precisely the fan-blade arrays and mechanisms that make jet turbines run.

These assemblies have to be precisely balanced because they whir at impossible speeds, under impossibly high pressures, at impossibly high temperatures. The techniques my friend taught, he said, were “workbench” expedients, passed down from engineer to engineer, and kept secret both within the company and within each laboratory. They were unpatented “lore,” but absolutely essential to making jet engines functional, reliable and cheap.

This secret lore is undoubtedly one reason why, although many firms make aircraft, only three firms make the jet engines that let them run: America’s (and Canada’s) General Electric, the Brits’ Rolls-Royce, and a French-European conglomerate once called Snecma, but now (I think) a part of Airbus.

Unlike bankers and economists, who seems to think technology is as fungible as money, the engineers and managers who run these jet-engine companies are fully conscious of the extent to which science and technology are seamless webs. They would no more think of letting loose offshore their hard-learned techniques for balancing jet-engine turbines, or for detecting and eliminating metal fatigue in fan blades, than would a general in our Air Force think of releasing the secrets, including computer programs, for designing and maintaining nuclear weapons.

These managers know from practical experience of decades and careers how much of technology and science actually belongs to the men and women who practice and develop it day to day. They would no more expect to retain leadership in technology by entrusting its day-to-day pratice and development to foreigners than they would think of e-mailing our atomic secrets to the KGB.

3. The absurdity of a “service economy.”

While the transfer of American factories overseas was in full rage, globalized free-trade advocates came up with the notion of a “service” economy. Asserting that modern economies like the United States’ rely on services for 80% or more of their value added, these economists insisted that our losing even all of our manufacturing offshore would be no great burden.

When an advocate for anything proposes his own reductio ad absurdum, you know his grasp of reality is tenuous. Imagine a society with no manufacturing whatsoever. What “services” would we perform for each other? The elite among us might perform legal and accounting services, or manage each other’s money, while teaching each other music and the arts. But what would the average Joe and Mary do? Bake cakes and take photos? sing each other songs? dress each other’s hair? And how would millions support a decent standard of living doing these things?

Whence would come the computers, smart phones, ovens, cooking equipment, musical instruments, easels and hair curlers to do them? With what exchange would we purchase them, presumably from abroad? Would we perform banking services for the foreign manufacturers and help them sue each other? Would we send our musicians abroad to sing for the “hard currency” to buy stuff made there?

A “service” economy would be an economy without science or technology. Yet these are the two fields that have made us pre-eminent in commerce and war, at least since Abraham Lincoln set out to insure that each of us had at least a high-school education.

No, the notion of a service economy came from the fevered brains of folks who never set foot in a factory, machine shop or auto shop, or, if they did, failed totally to comprehend what they saw there. A full-service economy is as likely to occur on our Earth as a society based entirely on song, dance and telling tales. But it sounded good and kept the wolf from the door of the rapidly arbitraging and self-enriching managers, at least for while.

Yet this is the kind of nonsense that economists have fed us to keep us believing that the lab rats who gave us Trump and Brexit must be mad.

Conclusion.

No, the experiment in globalized free trade has already failed on its own terms, just as did the fair trials of Communism in Soviet Russia and “Red” China. Far from making everyone better off, globalized free trade has produced vast social dislocation in advanced nations. It threatens to drain the so-called “advanced” countries of their scientific and technological skill and their leadership in innovation. As times goes on, it could even drain their educational institutions, or force them to serve the nations that most need science and technology: the manufacturing ones.

The question is not whether the globalization experiment has failed. We know it has from the bizarre effects it has already had on politics, commerce and trade. The questions are how and why it failed and whether there are any simple adjustments that can keep it from failing further.

So far, the prospect of simple adjustments is doubtful. The reason is clear: “labor” is not just a factor of production but a part and a characteristic of a people. It and the “know how” it involves are part of their society and their social, industrial, scientific and technical infrastructure. The labor of making things is also part of a people’s training and education, which are vital social and economic goods in their own right. Any economic theory that fails to take them into account neglects the driving force of innovation and any society’s advancement.

Some day, we may have a quantitative theory of these vital social goods. But we don’t today. All we have is the wreckage of an overly simplistic one-dimensional model, tantamount to the “best of all possible worlds” theory popular among the elite in Voltaire’s day. It’s a simplistic model that those economists who serve as handmaidens for the most rapacious capitalists used to justify their self-enrichment at society’s expense. It’s Alan Greenspan’s and Milton Friedman’s blind faith that markets are self-correcting, when we know differently from the hard experience of the Crash of 2008, Volkwagen’s cheating on its emission tests and Wells Fargo’s selling millions of customers auto insurance they didn’t want or need. If this is science, then whatever did Galileo risk his life for?

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