Michael H. Goldhaber

Paul Krugman in Sunday’s NYT has an article entitled “How Did Economists Get it so Wrong?”

It’s fine as far as it goes, I think, but it misses so much, since it just focuses on financial economics. No mention of the growing wealth inequality in the US and its effects, such as forcing people to buy on credit, or using their homes a piggy banks (as long as the price was supposedly rising). No mention of the problem with the assumption that existing workers who lose jobs once they get moved abroad can find good new ones. No mention of the dubious belief that more international trade is always a good thing. and no thought at all that standard economics won’t adequately describe the actual world forever (or even now).

[Note: this is another entry in my attempt to make sense of the crash and see how it is tied to the Attention Economy. Some earlier entries are here, here, here, here and here.]

I attended an informative, thought-provoking and amusing talk by Prof. Brad DeLong of UC Berkeley on Tuesday on the financial crisis “of 2007-2009” (he expects the crisis to have diminished by the end of this year). (The talk was part of the OLLI series on the crisis).

DeLong is primarily an expert on finance, and perhaps for that reason I felt his focus was a bit off. Along with most economists he seems to assume:

1. Nothing has fundamentally changed; industrial capitalism will go on much as it has “once the crisis is over”
2. There is no problem with the assumption of endless growth and endless increases in productivity, and no contradiction between these and full employment
3. The source of the crisis is fundamentally financial in nature.

I disagree with all three of these assumptions. (Of course, finance is far from my specialty. )As DeLong made clear, unlike most recessions since 1950, this one was not caused the Federal Reserve’s raising interest rates in order to dampen inflation. Further, a graph at the beginning of his talk, showing employment as a percentage of adults  (I assume from 18 to 65 years old) revealed that while employment ratios grew tremendously from 1970 on as a result of feminism and women’s  entering the workforce in droves (voluntarily or not), the employment ratio fell sharply in 2000-2002, and did not recover at all completely before this current sharp downturn.

In my view the unwarranted growth of the financial sector over recent decades, and especially more recently, covered up declining incomes among much of the populace. Further, the issuance of low cost and even poorly vetted mortgages and other forms of credit, including home equity lines, covered over the reduced buying power of ordinary workers. That arose from the more intense international and automation-related competition of the past decade and a half. Construction work cannot easily be off-shored, but it was eventually bound to come to a halt or at least sharply slowed down. So the lowered purchasing power, which  was hidden by too-great credit expansion and construction work combined, is now visible. Increasing credit and even a stimulus package, unless it is to be repeated again and again, cannot prevent this buying power reduction. Also, as labor productivity continues to rise, barring hugely increased government spending (on what?) consumption cannot reasonably be expected to rise at a rate that will allow full employment.

What of the financial  sector itself, with its rich profits in recent years and high wages and other remuneration? To be sure, capitalism requires a financial sector to move credit to new areas, etc. But how big should it be? Just as computer-based automation has cut jobs or lowered wages in other sectors, it should have done this even more dramatically in finance.  Given any fixed set of financial transactions, most steps are routine and can easily be turned over to computers, as anyone engaged in personal online banking, purchasing and bill paying should be well aware.

But rapid computation and rapid money transfers via the Internet, etc., have allowed a new  kind of financial activity, including all the vaunted derivatives. While some minimal level of trade in such things may have had beneficial effects outside the confines of finance itself, to a large extent it has become a sector that operates completely in its own sphere. The only actual connection to the rest of the world are the dividends to bank-holding-company shareholders, returns to hedge-fund investors, and the super-high bonuses paid to many finance-sector workers. Many of these gains, of course, were reinvested, and have now partly or wholly disappeared, but others were spent on various luxuries, which did create considerable employment outside the pure financial sphere.

The essential activity of this sector, however, amounts to the equivalent of shaving the coins passing through, but, using electronic funds transfer and operating digitally, the returns per finance worker appear much larger, and there are no tell-tale shaved coins to be seen. To the extent the financial activity encourages investment by outsiders in the stockmarket or other kinds of instruments, it also appears to create wealth by inflating purely financial prices, such as the prices of bundled mortgages or of many common stocks. But that mythical wealth simply disappeared in the downturn.

Risky financial shenanigans, as DeLong eloquently argued, are hard to prevent or regulate, but they can be seen as adding only mythically to the GDP. When the balloon is punctured, the more accurate state of affairs returns, though very much to many people’s discomfort.

My uses of terms such as “mythical” and “accurate” in the preceding two paragraphs is perhaps slightly slanted. If prices are what people will pay, these inflated values are no less accurate or no more mythical than any others. So let me instead suggest that in addition to what may be called industrial-product value and what might be referred to as attention value, the finance sector creates an additional sort of value of its own, call it “transactional value”, that has little basis in either of the others and has a balloon-like quality of growing until it bursts, which describes what happened recently and what can happen again. But the underlying question as to why it happened now is not fully explained by that description.

Further into his talk, DeLong presented a slide stating that, of 80 trillion dollars of financial assets before the meltdown, only one trillion had been invested in bad mortgages. Nonetheless net financial assets have declined by 25%.  The other 19 trillion were, according to him, reduced because too many assets have been discounted either because of risk or because of lack of information. I see it somewhat differently. Assets, such as stocks, were overvalued before the crash on the same basis as mortgages, that is with the assumption of endless growth. For example, stocks are priced to reflect prevailing assumptions not about present profit levels continuing but about future growth of profits. In most cases these assumptions were just hopeful and not fully warranted. Because there was so much money floating around, it had to go somewhere and ended up in the stock-market, driving prices up. Anyone who had invested in a typical stock earlier saw the asset growing in value, even if there was nothing besides these more recent stock purchases underlying that appreciation in price. Similarly, new inventions and commercial real estate, as well as other sectors, had gained because of unwarrantedly rosy assumptions. Now that  it is evident that Americans are in debt and have no further home equity to draw on, they are on the whole in a much worse position to purchase anything, or even to pay off loans. Thus the current credit crunch and reduced spending are not due to jitters beyond the mortgage crisis but directly related to it.

In the question period, someone asked DeLong whether the crisis was partly caused by flat average wages since 2000. Pausing to consider this question, as if for the first time, DeLong opined that that was not a very significant factor in the current troubles. Had the questioner asked whether the growing inequality of incomes and wealth between the rich and everyone else were  partially at fault, would the answer have been the same? Had wages risen as in earlier periods, keeping pace with productivity growth, the need for borrowing would have been much less, so either ordinary people would have been able to save, or consumption would have been at a higher level. The financial sector would not have gotten so far out of balance. So a key question is, just why did wages not grow?

One answer is that the existence of home equity and easy borrowing lowered labor pressure on wages, but I doubt that is the whole answer. Workers were afraid to ask for  wage increases, because the more they took home, the greater the danger that their work would somehow be off-shored or automated. If, as I have suggested repeatedly, we are moving towards an attention economy,we are the stage in which income crudely speaking tends to reflect the attention a person gets. DeLong gets paid more than a typical factory worker, for instance, because he gets more attention. Still, he get not nearly as much attention as Alex Rodriguez, and that is reflected in the difference in their emoluments. Higher productivity would increase incomes only to the extent that the workers in the automated factories impart some essential aspects of themselves; if they are fully replaceable, they remain pretty much invisible. Within the ordinary manufacturing and services sector, only the designers of processes and products have much chance to get attention, however indirectly. But even they must compete for attention. That leads to a limit to growth. All acts of consumption are acts of attention paying, and there is only so much attention to go around.

Why has this not always been so? Because the competition for attention has kept heating up of late. Thus attention inequality and wealth inequality partly track each other. The financial wealth that is now disappearing was somewhat outside that, so attention and wealth May be even more fully aligned in the future. Insofar as this is an industrial depression, more off-shoring and faster productivity growth will coincide with further downward wage pressure and more invisibility for ordinary workers and for many corporations that do not have compelling visions at their heart.

Finally, let me add some thoughts about the stimulus and its likely effects. I’ve long been a Keynesian as far as the standard economy, so I do welcome a stimulus, and wish it were even larger. DeLong didn’t say much about it in  his talk, although generally agreeing with me so far. But he does say more on his blog. He suggests there that the ‘multiplier” could be greater than one. In other words, for every dollar the government spends in stimulus, more than dollar’s increase in GDP could result. DeLong cites studies of various American wars to argue that in the past the multiplier was about 0.8. I must say I would have thought it would have been larger. To some extent the multiplier must depend on how rapidly money turns over, that is how quickly money can move from pocket to pocket. It also depends on how  many times the money is spent in the community in question as opposed say to leaving the country. As a crude guess, we should now expect some of the money to be put into savings or to pay off existing loans, but since banks are unwilling to lend, those payments may not help create further employment. Also, money spent on standard consumer goods will partially leave the country, probably at a higher rate than in the past. Thus the stimulus will certainly put people to work but not do quite as much as is hoped.

But the idea of the stimulus package is also to help in other ways, by preparing the US capitalist economy to work better, so that further stimuli are not needed. Of that, I am skeptical. On its own, the stimulus will not do much to create greater equality. It also can do little to redirect rising attention inequality which will be of increasing importance. It will not prevent off-shoring of industrial jobs in both manufacturing and services, nor prevent increases in productivity. While I am an ardent supporter of good education, I also do not believe that increased education or even better eduction necessarily translates into high-end jobs for everyone. (See also here , third graf from the end). Some people will be able to turn their educations into getting more attention for themselves, but others probably won’t. One can hope that educators will instill a necessary sense of community, but at present that seems like a long shot.

I think we are entering a new stage of history, and we don’t yet see how it will play out well for most people.

SUCCESS REACHES ITS LIMITS
In my previous post on the crisis, I claimed that we are suffering from too much savings and not enough consumption. The worldwide pool of money seeking growth investments is too large to be sensibly invested in any sort of production or service-providing corporation. The reason for that is that consumption is just too low, and is not likely to be able to rise to the levels needed to sustain such investment.

In other words, because it has been so wildly successful, the industrial economy — or industrial-market money system — has pretty much reached its limits. Think of an economy in this sense as the ways in which a social system or several are knitted together through the distribution or exchange of an entity — or class of entities — both scarce and desirable. In the industrial economy those entities, primarily, are standardized goods (or standardized services), along with the standardized work needed to make them — and of course, equally standardized money.

MONEY AND STANDARDIZATION
Standardization of the things exchanged is key for a money economy to survive. If goods were each unique, their prices would be all over the map, and would mean nothing. We have some idea of the worth in money of any new pickup truck relative to a quart of non-fat milk because each is standardized to a great degree. You won’t find a new pickup truck worth only $2 if that’s the price of two quarts of milk, neither will you find a standard pickup for sale for $1 million dollars, for instance. (Unique objects, such as paintings, do have prices that vary even more wildly than that. A whole economic system revolving around paintings would not have much use to make of standardized dollar bills.)

Without predominance of standardized goods in people’s work and consumption lives, money tends towards meaninglessness. Without money, no markets, such as we know them. No stock markets either. That is where we are headed, I believe.

EFFICIENCY WITHOUT END
OK, so how does success limit the future growth of the system based on standardized goods? We do know it’s successful in the following sense. Endless numbers and kinds of such goods and services are now available, and the glory of the system is that it gets more and more efficient at doing all that. In other words, productivity is growing, in fact, the increase even seem to be speeding up. As the world grows more connected, ever more efficient means spread ever faster. New management techniques, for instance, can radically reduce the need for workers and can be learned from one industry and applied to many others in only a few years. New forms of automation spread rapidly, as computer applications is one industry are adapted to others with minimal tweaking. (Likewise, it gets ever easier to move most standardized work to wherever workers are willing to work for the least pay.)

Productivity (or, more precisely, “labor productivity”) means simply how much or how many goods or services a worker can produce in a given amount of time. No reason that can’t keep growing forever. Here’s the catch, though: Why produce what cannot be consumed?

CONSUMPTIVITY
Let’s call “consumptivity” the amount of goods and services a person can consume in a given amount of time. (A few others use this word, but I define it a bit differently than some. For me, it indicates the ability to consume goods and services, regardless of whether or not one has the money to buy.) If consumptivity cannot rise forever, then rising productivity will either lead to a shortening work day, or to growing unemployment, to the point where the entire industrial economy employs hardly anyone. That would mean the whole basis of the money economy will eventually disappear, as I shall show in more detail a little further along.

That would not be relevant, of course, if consumptivity can possibly keep rising endlessly. But it can’t. In terms of attention, here is the dilemma: with more and more efficient production, standardized goods and services can be turned out with less and less attention per item. In general, however, consumption that takes less and less attention does not make sense. There may be exceptions for strange pursuits such as hotdog eating contests, where minimal attention goes to each hot dog consumed. But most of the time, a good or service is only of real value to us if we do pay some attention for some or all of the following reasons:to learn of the item in the first place; to seek it out; to obtain it; to learn how to use it; to figure out how to keep it or access it; (most importantly) to actually enjoy or use it; to maintain it; to clean up after it; to display it to others, and so on. If the attention you pay is too little, having the actual item is no better than having the cheapest possible imitation of it. Since the total attention you can pay in your life is limited, if you keep increasing consumption there will clearly come a point when you cannot sensibly consume any more. Even if you are fairly irrational in your consumption habits, you will still reach a limit.

Here’s one example of that kind of irrationality: What if you accumulate items that you only know you have, never laying eyes on them, because mere legal possession affords you satisfaction just in case you would ever want them? (Remember it is consumption not investment, that we are discussing. However, it turns out something similar is true for as well.) First of all, even knowing you have something requires some attention, and there would surely be no value in accumulating more and more things without ever even knowing it. Besides that, as efficiencies of production and distribution increase, the satisfaction of actually owning something you never see is no different from knowing you could quickly obtain it should you ever want it. Further, if you buy it just to have it , sight unseen, you can’t tell the difference between actually having it and being told you do. Within the industrial system, someone would devise a way to sell purely notional products were this degree of over-consumption to become commonplace. That would employ almost no one.

Or what about simply buying goods not to keep, but to give away to others? It won’t avail. To make your gift be other than nonsensical, the recipients would obviously have to pay attention to them in order to derive any satisfaction. So, again, net consumption for everyone would still be limited.

And so on…This argument can be carried out at any length. The point is that per capita consumption cannot even approximately sensibly grow forever, and that means that the industrial economy eventually has to become less important.

BUT THEN ADD THE RISING ATTENTION ECONOMY
Meanwhile, the pursuit of attention for its own sake is on the rise. This includes artists, writers, movie makers, bloggers, text messagers, contributors to comments on others’ blogs, music, video or photo uploaders, listserv contributors, and so on. The number of such attention-getting attempts that do not require attention payers to pay any money keeps going up. That means , in part, direct competition for the attention that people otherwise could have spent consuming goods and services that are bought. This will bring us to the consumptivity limit even faster.

WHY NOW?
All right, perhaps I have convinced you that there will be a consumptivity limit someday. But today? Surely I can’t claim that everyone has all the goods they can consume now. Most people in the world in fact don’t have the wherewithal to buy even the minimum needed for a good life. A sizable minority don’t even have enough to eat. I will discuss inequality more in the next installment, but it should be clear that one reason a lot of people have too little is that growing productivity has made many producers — such as small farmers — economically un-viable, forcing them into greater poverty. That is precisely because consumption did not increase as fast as production, on average.

At the same time though, a substantial slice of the population of the better-off countries has already reached a limit at which their consumption of standardized goods is pretty much at a standstill, or only very slowly growing, despite the fact that they are exposed to ever more advertising. And in between there a vast mass of people who could consume somewhat more were their tastes to have a chance to develop and were the institutions that would allow them to consume more in place. However, by the time their desire to consume considerably more would match the capability of institutions — such as electrification, roads, sufficient housing, etc., —productivity would have risen enough so that they and all the others would still not be consuming all that could be produced. In other words, effectively unused capacity to produce keeps rising.

To take one example, consider the incredibly widely adopted cell phone. Over the past two decades the phones have become a standard and useful possession for a huge swath of people the world over. In that time, the phones have added more and more functions, replacing a variety of other gadgets in the process. More and more purveyors have begun offering them, in endless models. But as sales of some models rise, those of others fall, in such away that it is quite clear that far more could be sold should the demand arise. But throughout most parts of the world where cell facilities (such as the needed towers) exist, virtually everyone has one already, and usually a pretty recent model. A few people have multiple cell phones, but there is little point in having as many as ten say. Capacity to produce them could easily rise if demand were to grow, and the phones will probably get much cheaper, but the no matter how cheap, the market is pretty much saturated.

Of course, these phones, especially of the “smart” variety greatly increase opportunities to seek, obtain and pay attention , attention that competes, as I described above, from other consumption. Even very poor people, in this way, become more linked to the attention economy than to the money economy. Change to the new system happens ever faster.

An Aside on Resources
As an aside, let me point out that resource limits do not prevent the rise in productivity. Every kind of material resource, including energy, can be substituted for with easier to make alternatives, once that particular resources becomes problematically scarce. Overall increases in productivity, if anything, speed the process of resource substitution.

CONCLUSION
We are left with not enough prospects for industrial growth to absorb world savings. Of course, if typical workers could be paid more, so that spending would be closer to the limits of consumptivity, the world would be in more balance longer. But for reasons I will discuss in the next installment, that state of affairs seems less and less achievable. And anyway, it would only slow the inevitable.

Friendship might be defined as a state of more-or-less mutual attention paying. From little acts of attention, including times when you just are together, talking, walking, or engaging in some joint activity your minds get into sync so that you can align easily (that is pay attention)  to what the other is saying or doing, feeling or thinking. Long friendship makes attention all that much easier and full.

No wonder people clamor for friends, and even for claiming friendship in crude ways. For example, the social networking site Facebook makes it easy for people to try to establish a somewhat ersatz friendship with you when all they may know of you is your presence on the public friends list of someone who is indeed your friend.  And that can quickly accelerate to claming friends with even more degrees separation. Friend of friend makes some sense, of course. If someone is genuinely friends with both of you, you can align with the second –degree friend in part by however the two of you both align with the one you have in common.

What you know about your friends includes funny little things, little admissions, some somewhat scandalous pieces of action on their parts, their little annoying habits, as well as their pleasant enjoyable ones, and it all helps make them real, making it easier  for you to align with them.

Take this one step further. What you don’t happen to know about a friend of yours you will eagerly want to learn from some other friend, and in so learning, you not only can feel a surge of guilt over stumbling upon a secret, but a new sense of connection both with the friend you are gossiping about, and the friend (or would-be friend) who passes on the gossip to you.
And now one more step. Suppose you don’t personally know the object of the gossip, but are familiar with them as a star. It could be Paris Hilton, David Letterman, Angelina Jolie, Barack Obama, Venus Williams or even a dead celebrity like Jean-Paul Sartre or Sylvia Plath. You have occasionally aligned with this person in listening to them on radio, or seeing them on TV, reading their words, in hearing of their performance, in repeating a joke they have told, and so forth. They have or had no knowledge of your existence, but they act or acted, in some way, like a friend. Anything that will add to this sense of familiarity will only make it easier for you to pay more attention to them, because the more real and human they seem the easier it is to align with them.

That is why we soak up memoirs, biographies, interviews and other less formal kinds of connection, such as gossip, about stars. The better it feels as if we know them, the more easily alignment becomes. That’s true even as we cluck over some scandal that might comport with some behavior we might dare not engage in ourselves, but still find in some degree enticing. And its equally true if they are caught in a behavior considered scandalous that we ourselves or those actually near us have engaged in many times.
Some celebrities may hate being gossiped about, being followed by paparazzi and all the rest, though often they also realize that gossip only helps build fan interest, gaining them more attention of a completely desirable type.

For a fan, even a mild one, gossip about the appropriate celebrities is an avenue to getting attention from other fans of the same stars, in the same way that gossip about close friends is.  We must be careful in easily accepting part of Paul Salomone’s response to my previous post : “I know of plenty of folks who waste hours a day charting the obscure maneuvers of far-off celebrities, whilst their personal lives are in high disarray. Were they actually to put some energy into their local communities, paying attention to local causes rather than watching Access Hollywood and collecting memorabilia, we’d all be better off.”

Unfortunately Salomone seems to ignore how the Attention Economy (or Attention Society) generally works and the real value that many people find in such gossip.  Attention equality is certainly in some ways a desirable end, but it is also hard to achieve, and not without some significant costs. For example, a  purely local outlook would still leave us blind to many issues in the global system we inhabit. If Angelina Jolie, for instance, tries to acquaint us with suffering in Africa, that would still less than it does if she could not get massive attention.

(In my next post, I will address the issue of what concerns are “important,” in response to other lines in Salomone’s comment.)

Paul Salomone has posted some interesting and I think valid comments about social justice in an Attention Economy. The issue is how do we go about equalizing what has become most important — attention from others. In an economy based on material things and money, governments have certain powers to help equalize things, even though with varying problems and difficulties. They can offer welfare, social security, require a decent minimum wage and provide various public services. They could go even farther by trying to make ownership of most material resources public and collective. But attention is different. We seemingly give ours freely. Would we accept legislation that says we must give equal attention to everyone? That seems hardly likely.

However, Paul cites the example of all the attention we give to Paris Hilton and other such empty celebrities. I think it is true we do not do this from completely free choice, at least at present, because all the media editors, recognizing that some fraction of the public would give her attention, try to get attention for themselves by invoking her as much as possible. (So do non-profit and private attention getters; for instance Paul has put her pic with an X through it on his site, so he is in effect using her to get attention, as indeed am I right now, to a slightly lesser degree.) People who would prefer paying Hilton no attention at all can find this hard to do.

All this means that some other people get less than an average attention share. What to do, if we favor equality? We can all try to pay attention when it is hard, but that seems unlikely to hold up terribly much. We can pay more attention to our own circles of friends and relations rather than more distant kinds of stars. That has slightly more chance of working, but the recent history suggests how strongly and easily we are pulled in the opposite direction.

One thing we can do, as Paul hints, is offer more and better modes of attention getting, combinations of technology and education, that would allow each person to find the best mode for getting attention for what is most truly and importantly to her and her concerns.

Another tack may be to realize that there are certain situations in which attention flows equally to all. In her recent book Dancing in the Streets, my old friend Barbara Ehrenreich suggests that communal ecstatic dancing is an age-old human activity in which almost all participants become less focused on themselves — or on any leader or star. This is true attention equality. It may well be one of the lures of “partying,” or many other kinds of deeply group activities.   One potential of “social networking” that may have something to do with its popularity may be the party-like, essentially egalitarian kind of atmosphere it could sustain.

I will soon post again about this and other — even opposite — promises held out by social networking.