Lorenzo Warby Complains about Economists
My complaints are somewhat different
Australia has much higher migration rates than does the US and the UK. Yet, you do not see the nannies, gardeners, and other personal services to the rich in anywhere near the same scale in Australia as in the US and the UK. Australian car washes are still mechanised.
That is because Australia selects migrants such that their average level of education (their human capital) is higher than that of the residents. Migration into Australia therefore does not reduce the Baumol effect. If anything it increases it, as capital increases faster than labour.
Are all of these highly-educated immigrants mowing their own lawns and cooking their own meals? If so, then this is a very inefficient way to run an economy. But it might reflect a scarcity of low-skilled workers, which helps to raise their wages, if that is what you are after.
Warby also says
Remember, nothing in biology makes sense except in the light of evolution.
Warby levels the charge that economics is
anti-scientific—because not oriented to the correct level of structure—emulation of Physics, rather than the consilience with biology required for Economics to be science.
Note that Darwin himself credited Thomas Malthus with supplying some of the inspiration for the theory of evolution. And evolutionary thinking is constantly reappearing in economics. Warby praises the concept of satisficing (as opposed to maximizing) without crediting Herbert Simon, who (a) coined the term, (b) was awarded a Nobel Prize, and (c) was known for taking an evolutionary approach. Indeed, Simon’s Nobel lecture includes this excerpt:
If we wish to be guided by a natural science metaphor, I suggest one drawn from biology rather than physics (Newell & Simon, 1976). Obvious lessons are to be learned from evolutionary biology, and rather less obvious ones from molecular biology. From molecular biology, in particular, we can glimpse a picture of how a few basic mechanisms - the DNA of the Double Helix, for example, or the energy transfer mechanisms elucidated so elegantly by Professor Mitchell - can account for a wide range of complex phenomena.
Nonetheless, it is fair to say that within the economics profession, Simon’s evolutionary focus is more the exception than the rule. The complaint about mainstream economists’ relentless focus on maximization has some merit.
But one of my big complaints about mainstream economics is its continued use of the aggregates of “capital” and “labor,” when those concepts are heterogeneous. The attempt to describe production in terms of exactly two factors is a failure, in my view.
Yet Warby tries to rely on this distinction. Of course, he immediately has to modify it in order to emphasize the difference in the supply of skilled labor and unskilled labor. That gives you three factors of production, not two.
But then you have to look at all of the other differences that affect relative prices. Not all college degrees are equally financially rewarding. Not all differences in economic rewards can be explained by education. Economists have come up with more categories of “capital” than I can even remember. Social capital, networking capital, relationships capital, emotional capital, identity capital, institutional capital, cultural capital—all of these, and more, have been proposed.
The phenomenon of personality traits makes this even more complicated. Any of the “big five” traits can turn out to be positive or negative, depending on circumstances. Being open to new experience can be an advantage for some jobs and a disadvantage in others. The same with being conscientious, extroverted, neurotic, or agreeable. And there may be other personality traits that matter also, including systematizing vs. empathizing.
We can see that the question of whether more immigration is “good” or “bad” for a particular subset of workers is much more complicated than can be answered by thinking in terms of two or three factors or production. What I call the patterns of sustainable specialization and trade are able to arrive at many different configurations.
I find it plausible that very rapid immigration flows put a strain on the economy’s ability to adjust.
But my intuition is that the main problem in the U.S. economy is that too many highly educated people work for government and for non-profits, where they mostly make trouble for the productive sector. There are workers who could be useful and decently paid in infrastructure, energy production, and housing construction—if the moochers would get out of the way.
Substack referenced above:
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I'm hoping Lorenzo hasn't gone to bed (he may have - it's quite late on Saturday evening in Australia). I'm sure he'll have a response :)
For my part, "not just in the US" applies to this observation: "my intuition is that the main problem in the U.S. economy is that too many highly educated people work for government and for non-profits, where they mostly make trouble for the productive sector. There are workers who could be useful and decently paid in infrastructure, energy production, and housing construction—if the moochers would get out of the way."
In the UK & Australia, NGOs and many charities have become actively destructive to the wider economy, and not just through obvious things like encouraging their members to block roads during protests.
The criticism of not crediting Nobel Memorial Herbert Simon with satisficing is absolutely fair and will be corrected in the published version.
Satisficing does not seem, however, to have been taken up all that much. Maximisation is much more tractable mathematically. Also, satisficing does have a bit of a “how long is a piece of string?” problem. Hence the point about salience. Not sure how more mathematically tractable it makes the concept, but it does at least point to what to consider.
I have no particular problem with the land/labour/capital division in factors of production. You can, for instance, usefully analyse the politics of trade post steamships and railways on the basis of which was scarce or plentiful in a particular country: scarce factors of production favoured protection, plentiful factors favoured free trade. Two out of three determined whether free trade or protectionist pressures won.
The skilled/unskilled labour division strikes me as better analysed as there being a spectrum in the mixing of labour and capital. That is, they are different factors of production, but often not separate.
The bigger problem is with lumping in financing with the “rest” of capital. Ownership follows who covers the risks: which is about financial resources much more than physical plant and equipment. Calling it all “capital” muddies thinking and encourages “wind-up toy” analyses of economic growth.
Using migration to raise returns to capital, but depress returns to labour, has problems, apart from increasing inequality and social division. If you want to encourage technological progress, you want higher wages not lower: more productive workers that generate a bigger return in adding capital.
As for gardening, etc. services in Australia, they are provided by bog-standard self-employed providers, often on a franchise system, not notably dominated by migrants. One is quite likely to have native-born folk providing gardening services to migrants. https://en.wikipedia.org/wiki/Jim's_Mowing
Also agree that treating migrants as interchangeable widgets is pretty silly.
The multiplying categories of capital, the produced means of production, is an issue. Part of the problem is that Economics tends to be a little exchange/transaction obsessed and less concerned with connection. Coercion, exchange, connection and structured sharing (“pooling”) are the base social interactions. Gifts, for instance, are investments in connection. Calling connection ‘social capital’ helps economists consider it, though not as much as they should. (The anthropologists’ term of ‘relational wealth’ is perhaps not much of an improvement.)
As for too many folk in non-productive (or even anti-productive) jobs absolutely. Patterns of such interior colonisation of our societies will be a continuing theme in future essays in the series.