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The Childish Babbling of a Say...

Duncan Foley (2006), Adam's Fallacy: A Guide to Economic Theology (Cambridge: Belknap Press: 067402399).

It must be a theology book, for Duncan Foley has worked a miracle, a dark miracle. He has created in me--me! J. Bradford DeLong!!--something that I thought would never happen: the desire to say something good about Jean-Baptiste Say.

Foley has done this with a book that claims that Adam Smith holds to a:

P. 3: moral fallacy... urges us to accept direct and concrete evil in order that indirect and abstract good may come of it... [while] neither Smith nor any of his successors has been able to demonstrate rigorously and robustly [how].... Smith's rationalization... requires... wholesale denial of the real costs of capitalist development...

Let's get this clear. Foley thinks that it is immoral to weigh "indirect and abstract" goods that come from capitalist development against "direct and concrete costs": that doing so is "wholesale denial of the real costs of capitalist development." That is what Foley calls "Adam[ Smith]'s Fallacy."

What are these real costs? Let's read further, beyond page 3. Division of labor... Advantages of the division of labor... Detail and social division of labor... Division of labor and extent of the market... The Virtuous Spiral of Economic Development... "Say's Law." Ah. Here we are, on page 10: Foley comes to the first real cost of capitalist development about which Adam Smith is in "wholesale denial": technological unemployment:

P. 10 ff: The increasing division of labor with its consequent rise in labor productivity has at least one immediate negative effect: a reduction in the demand for labor in industries undergoing rapid rises in productivity. The reason for this is that the increases in the productivity of labor may run ahead of the widening of the market. Even though more units of the product are being produced and sold, if labor productivity is rising ever faster, fewer workers will be required to produce the output, and unemployment can result.

Smith acknowledges this effect... but argues, on the basis of reasoning that later came to be known as "Say's Law," that in the aggregate there cannot be a chronic excess supply of labor.... The reasoning... is... that the source of demand for commodities... is just the willingness of workers and the owners... to make their resources available for production. In real life, this potential demand can become effective only if money is available to finance the start-up of production.... Smith and his successors who reason on the basis of Say's Law are assuming that the financial system... is flexible enough... belie[ving] in the efficiency of the financial institutions of a capitalist economy.

This is Adam [Smith's] Fallacy in action. The immediate effect of increases in labor productivity is to impose costs (unemployment) on a group (workers) who are in a weak position to protect themselves from these costs. Ordinary moral reasoning would regard this as a bad thing. Smith offers the hope that some of these displaced workers will eventually find alternative jobs (though some others may not), and that lower prices of products will benefit consumers of products. Thus the direct, concrete evil of unemployment is instrumental to achieving the indirect, abstract good of lower prices...

Where should we start? He talks about "Adam [Smith]'s Fallacy," so I guess we should talk about "Foley's Follies":

Foley's Folly #1: The assertion that the costs of higher labor productivity are "direct, concrete" while the benefits of higher labor productivity are "indirect, abstract." Lower prices that give consumers higher real incomes are exactly as concrete and as direct as are income losses from unemployment. The best thing you can say about Foley's claims that these benefits are in some way "abstract" and "indirect" is to say that you could grow really good tomatoes if you spread his claims around their roots.

Foley's Folly #2: The claim that technological unemployment is the rule. More often than not, a rapid rise in labor productivity in an industry is associated not with a reduction but an increase in demand for labor in that industry. That was certainly the case in the steam-machinery-cotton complex in Manchester at the start of the industrial revolution, or the steel-rubber-gasoline-automotive complex in Detroit at the start of the twentieth century. That is certainly the case in the silicon-electronics-computers complex in Silicon Valley over the past two decades. I don't know where Foley's claim that technological unemployment is the rule in fast-productivity-growth industries could possibly have come from.

If the elasticity of demand is low, rapid technological progress in one industry might be associated with a reduction in the demand for labor in those industries. But it would not be if the elasticity of demand is high. For Foley to say that this technological unemployment in low demand-elasticity industries is "one immediate negative effect" of the division of labor without also saying that technological employment in high demand-elasticity industries is "an additional immediate positive effect" of the division of labor--that's Foley putting his thumb on the scales in a foolish way.

Foley's Folly #3: The assertion that a belief in the theoretical truth of Say's Law--in the efficiency of financial markets--is necessary to support the claim that the market system is for the general good. Say's Law certainly does not hold anywhere in the short run. That's why we have the Federal Reserve--an island of central planning in the middle of our economy to try to ensure that even though Say's Law does not hold in theory in the short run, we can make a not too intolerable approximation to it hold in practice.

Foley's Folly #4: Duncan Foley's calling a belief in efficient financial institutions "Adam [Smith]'s Fallacy in action." Adam Smith was well aware of financial market failures and thought hard and carefully about them--witness II.2 of the Wealth of Nations. Giving real people's names to straw men of your own devising is impolite. That Keynes did it to Pigou and company is not an excuse.

Still worse, in my view, is Foley's Folly #5: It turns out that Duncan Foley doesn't believe that technological unemployment is the rule. Immediately after this song-and-dance about the "direct, concrete" costs that labor productivity growth generates via increased unemployment, costs that "ordinary moral reasoning would regard... as a bad thing," Foley writes:

Over long periods of time... something like Say's Law does operate... there is no long-term drift towards constantly increasing unemployment as a result of technological change...

Unless Foley wants to maintain--which I don't think he does--that in the absence of technological progress we would have steadily falling unemployment, what he is saying here is that unemployment is not higher as a result of technological progress. There is no cost to charge against the benefit of higher productivity. Technological unemployment is a non-issue. And I cannot understand why Foley raises it--let alone introduces technological unemployment as his first example in his book of the "real costs of capitalist development" about which Adam Smith is in "wholesale denial."

At this point, at the bottom of page 11, Foley seems to recognize that something has gone wrong. He immediately reverses course:

On the other hand, over shorter periods, the absorption of technologically unemployed workers into new jobs can be quite slow, creating real social, economic, and political problems. The stubbornly high unemployment rates in many Western European economies over the last three decades of the twentieth century are an example...

Which is Foley's Folly #6. I don't think I understand high Western European unemployment. But I do not think that the first-order cause of high Western European unemployment was rapid labor productivity growth. If high Western European unemployment were primarily technological unemployment, it would have been highest in the 1960s and early 1970s when European productivity growth was fastest, not in the less technologically dynamic 1980s and 1990s.

Foley does his readers no good service in holding up Western Europe since 1975 as an example of technological unemployment.

I must say that I thought that the day when I would have a good word for Jean-Baptiste Say would never come. But by the time I had finished page 11 of Adam's Fallacy, it had.