The Accidental Theorist Read Free Page A

different matter. In our hypothetical economy it is—or should be—obvious that reducing the number of workers it takes to make a hot dog reduces the number of jobs in the hot-dog sector but creates an equal number in the bun sector, and vice versa. Of course, you would never learn that from talking to hot-dog producers, no matter how many countries you visit; you might not even learn it from talking to bun manufacturers. It is an insight that you can gain only by playing with hypothetical economies—by engaging in thought experiments.
    Is this thought experiment too simple to tell us anything about the real world? No, not at all. For one thing, if for “hot dogs” you substitute “manufactures” and for “buns” you substitute “services,” my story actually looks quite a lot like the history of the U.S. economy over the past generation. Between 1970 and the present, the economy’s output of manufactures roughly doubled; but, because of increases in productivity, employment actually declined slightly. The production of services also roughly doubled—but there was little productivity improvement, and employment grew by 90 percent. Overall, the U.S. economy added more than 45 million jobs. So in the real economy, as in the parable, productivity growth in one sector seems to have led to job gains in the other.
    There is also a deeper point: A simple story is not the same as a simplistic one. Even our little parable reveals possibilities that no amount of investigative reporting could uncover. It suggests, in particular, that what might seem to a naive commentator like a natural conclusion—if productivity growth in the steel industry reduces the number of jobs for steelworkers, then productivity growth in the economy as a whole reduces employment in the economy as a whole—may well involve a crucial fallacy of composition.
    But wait—what entitles me to assume that consumer demand will rise enough to absorb all the additional production? One good answer is: Why not? If production were to double, and all that production were to be sold, then total income would double, too; so why wouldn’t consumption double? That is, why should there be a shortfall in consumption merely because the economy produces more?
    Here again, however, there is a deeper answer. It is possible for economies to suffer from an overall inadequacy of demand—recessions do happen. However, such slumps are essentially monetary—they come about because people try in the aggregate to hold more cash than there actually is in circulation. (That insight is the essence of Keynesian economics.) And they can usually be cured by issuing more money—full stop, end of story. An overall excess of production capacity (compared to what?) has nothing at all to do with it.
    Perhaps the biggest objection to my hot-dog parable is that final bit about the famous journalist. Surely, no respected figure would write a whole book on the world economy based on such a transparent fallacy. And even if he did, nobody would take him seriously. But while the hot-dog-and-bun economy is hypothetical, the journalist is not. The inspiration for this essay was Rolling Stone reporter William Greider’s widely heralded 1997 book, One World, Ready or Not: The Manic Logic of Global Capitalism . That book is exactly as I have described it: a massive, panoramic description of the world economy, which piles fact upon fact (some of the crucial facts turn out to be wrong, but that is another issue) in apparent demonstration of the thesis that global supply is outrunning global demand. Alas, all the facts are irrelevant to that thesis; for they amount to no more than the demonstration that there are many industries in which growing productivity and the entry of new producers has led to a loss of traditional jobs—that is, that hot-dog production is up, but hot-dog employment is down. Nobody, it seems, warned Greider that he needed to worry about fallacies of composition, that the