The Human Queen of Economics

Economists are often conflicted about the relationship between their discipline and human nature. Standard theory is stuffed with assumptions that rival those of a geocentric universe. Indeed, analytic rigor still remains a deeply ingrained tradition of modern economics. Hopeful researchers are warned not to snub mathematical courses. And correctly so, it’s difficult to read through many a paper without a sound understanding of calculus and linear algebra.

Yet, Tyler Cowen writes in the New York Times that economics has a deeply egalitarian, even human, tradition. But no consensus here, Brad DeLong comments that morality and economics are inherently split, and Paul Krugman agrees. And there’s so much more where this comes from. Noah Smith has a string of blog posts lambasting the dynamic stochastic general equilibrium and utility curves, crowned with a prod at Cowen: Markets in Almost Nothing.

But there’s one statistic that is so human it removes any doubt that economists are deeply concerned about the human essence of growth. GDP might be the king on the chessboard, but unemployment rate is queen. We have to wonder why this statistic matters at all. As we know, production is the function of labor, capital, and land. During a recession, disemployment effects hurt all three, as workers are laid off, factories shut down, and land untended. In standard models, there’s little qualitatively different between the three.

But imagine talking about the unemployment rate of capital. Given five factories, ten screwdrivers, and fifteen tractors, if one of each is put in disuse do we face a 10% unemployment rate? Laughably, perhaps. But a screwdriver isn’t nearly as valuable as a tractor, let alone a factory. In labor market unemployment, however, we treat the unemployment of a farmer interchangeably with that of an engineer.

The real measure of recession and economic conversation should be the output gap. It accepts that not all men are created equal. But, economists everywhere worry about the unemployment effects of minimum wage (wrongly so, perhaps) and austerity (rightly so?). Theoretically, unemployment should be measured in value – this would even remove the need to consider underemployment. But it’s not, and economists are responsible.

And, because unemployment rate is designed atop of human constructs, economists should also be careful to let it serve as a key indicator within a model. Certain economists often speak of the non-accelerating inflation rate of unemployment (NAIRU), which posits that below a certain level of unemployment price levels will become too unstable to tolerate. This fundamentally assumes there’s something special about the number of people unemployed, rather than the total value of that employment. (The Phillips Curve, similarly, can’t convey any real truths about our economy. Its continued irrelevance due to falling labor share of GDP reflects its greatest flaw, unemployment rate doesn’t mean much).

We rarely hear these economists talk about the over-employment of capital in similar terms. (A 10% unemployment of capital by unit not value, anyone?) This also means that, at least without a minimum wage, there is no such thing as natural unemployment. We take it a priori that a human employed is better than a machine employed and, to the extent that capital can be replaced with labor, during periods of human unemployment the same wages paid on capital can be used to employ humans (granted, this might be peanuts).

This is a highly contrived example but does serve the point that there can’t be a magical rate of unemployment at which inflation suddenly takes off. This little ramble of a post, I hope, shows the very human side of economics. It’s surprising that a discipline so sterile of analytical models is as profoundly infected with egalitarian spirit as suggested by the prevalence of unemployment rate. We would know that economics was really the clammy, divorced subject so many make it out to be if headlines were crammed with talk of the output gap.

For now, we’re safe.

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