Arnold Kling's Patterns of Sustainable Specialisation and Trade (PSST)-model opens up promising new avenues for a more differentiated perception of the economy.
Keynesianism treats the economy as a single business producing one output, called GDP. This modeling strategy focuses all attention on the problem of choosing how much to produce. It assumes away the problem of choosing among outputs or the problem of choosing from among many possible production methods or supply-chain configurations.
This single output, GDP, is produced by a single technique, called the aggregate production function. Thus, the Keynesian modeling strategy ignores the existence of multiple alternative patterns of specialization. Keynesians act as if there were exactly one pattern of specialization in the economy. There is no need to choose among alternative patterns, to discard outmoded patterns, or to discover new patterns.
In the Keynesian framework, jobs are only lost when there is a drop in demand. In the PSST framework, and in the real world, jobs are constantly being destroyed, for a variety of reasons.
Economic progress consists of re-arranging production of output to be more efficient. It is an always-ongoing process that necessarily destroys jobs. A new consumer product makes other products obsolete, or at least less desirable. A new invention or managerial innovation makes it possible to produce the same output with fewer workers. A new configuration of trade uses labor more efficiently…
In the Keynesian story, all unemployment looks like the temporary layoffs that used to occur in automobiles and steel when firms accumulated excess inventories. Once inventory balance was restored, workers were recalled to the same jobs.
In the PSST story, all unemployment looks like structural unemployment. That is, workers who lose jobs will not find that those jobs return in several months, or ever. Instead, displaced workers will have to be employed by different firms, often in different industries.
In the Keynesian story, the process of economic adjustment to a shock consists of arriving at the correct relationships between the money supply and the aggregate price level and between the price level and the aggregate wage. In the PSST story, the process of economic adjustment to a shock requires entrepreneurs to discover new arrangements of tasks that add sufficient value to generate sustainable profits. As with all entrepreneurial effort, this is a trial-and-error process. Some new businesses will fail, generating no sustainable employment. Only a few will be so successful that they create large numbers of new jobs. Sorting out this process will take time.
From the perspective of someone who finds that the PSST story fits well with economic thinking, the Keynesian modeling strategy seems contrived and misguided. By aggregating the economy into a single business, Keynesianism necessarily shoves the phenomenon of structural adjustment and the ferment of entrepreneurial trial and error into the background. Keynesians regard this as a useful simplification. Instead, Keynesianism is more like Hamlet without the Prince.
Two brief remarks, perhaps to be expanded upon in later posts.
(1) Adjustments in PSST are thoroughly enmeshed with politically and legally induced changes to the economic playing field. It seems, the further one goes back in history the more willing is the libertarian to acknowledge the simultaneity and concatenation of politics, law and economics in the process of social (including economic) change.
However, libertarians find it hard to discover the continuation of this pattern in the contemporary world as they refuse to leave the high level of abstraction where broad-stroke distinctions like
- "exit" (stepping outside the political world or appearing to make such an escape)
- "voice" (participating in or being subject to the political world)
seem to make sense, while not being inclined to delve into the niceties of real markets which, in fact, are inevitably replete with the results of conscious design and competition for political and legal advantage.
(2) The other day, I was listening to a presentation on regime uncertainty - by a libertarian academic. What struck me was the similarity of problems of regime uncertainty between the stylised libertarian world of
- bad-government-here and good-markets-there, on one hand, and
- self-regulating markets as they truly operate in the economy, on the other,
the latter producing the same uncertainty, rivalry and rascality, whose engendering is supposed to be the sinful prerogative of government - only that more or less dirty politics in self-regulating markets is definitely real.