Why complicate things further?

A heuristic is something that makes a complicated thing easier to understand – they usually involve simplifying things so that complicated things become easier to understand. But sometimes I think people mistake for a heuristic something which in facts makes things more complicated.

Chris’s adoption Marglin and Bhaduri terminology of “stagnationist” and “exhilarationist” for describing post-war economic institutions looks like a heuristic but really makes things more complicated. The theory goes that up until the 1970s capitalists gained from statist interference and support for the working class as the economy would have otherwise stagnated. This flipped in the 1980s as capitalists needed a more easily exploitable working class and they used the state to weaken the bargaining power of the working class.

I have two critiques.

One is that the post war world was one with incredible investment opportunities, lots of easily monetizable technological progression with a great deal of catch-up growth possible too: the UK never caught up with the US in terms of living standards. US standards of living and rates of investment were clearly seen as sustainable from this side of the pond so why state support would be necessary is unclear.

To make my second point, I have negotiated the thicket of the ONS. The vast, vast majority of economic activity is so utterly mundane that it seems bizarre to suggest that it is possible for the economy to be “stagnationist” or “exhilarationist.” Most sectors just plug along, so any “stagnationist” or “exhilarationist” impulses would be driven by very small sectors of the economy.

The top seven or so categories of production in the national accounts are: Total government, health and education; Total distribution, transport, hotels and restaurants; Total production; Total professional and support; Wholesale, retail, repair of motor vehicles and m/cycles; Total manufacturing; Real estate; Financial and insurance; Total human health and social work activities.

That is some mundane shit and I’m not sure that the heuristics mentioned above are useful in describing an economy so boring.

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2 thoughts on “Why complicate things further?

  1. yeah there’s lots I don’t understand about that.

    take the idea that profit margins may be low, but aggregate demand is high, so profit rates are high.

    first, aggregate demand is a lot higher today than it was in the 1960s, so it’s confusing to talk about the level of aggregate demand being higher under stagnationist regimes.

    second, it sounds like the argument is under a stagnationist regime :

    low margin*high sales= good profits

    and so investment was high.

    but what’s process produces output here? If your sales are high, don’t you need more physical capital investment to produce said high quantity of output? So what’s your return on investment?

    if you contrast that with

    higher margin*lower sales= good profits

    the same profit is requires less investment (output is lower) so returns are higher.

    In what world is lower returns on investment a good way of encouraging investment?

    I guess I ought to read the underlying papers he links to, but unless I am missing something it’s hard to see how the story stacks up

  2. that was a hastily written comment …

    to clarify – if “high profit rates” are good for investment, and high profit rates arise when aggregate demand is high, then profit rates are increasing over time because AD increases over time. So something is missing from this account of why investment was higher in the good old days when profit rates were high.

    likewise, the idea that low margins accompanied by high AD (hence high profit rates) are good for investment, needs a “compared to what?” … the notion that social democratic policies drove profit margins down but AD up suggests a counterfactual with higher margins but lower AD. But aren’t returns to investment higher under the counterfactual? So how can social democratic policies have been responsible for high levels of investment?

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