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11 November 2004

Business Bicycles

My textbook is talking at the moment about business cycles. Keynes reckoned that fluctuations in aggregate demand caused by random factors, were the key to recessions and and general ups and downs in the economy. Other people believe different things, but the Keynesian philosophy is the one most governments hold. The problem is that there's a big lag between their expansionary or contractionary policies and when the influence is felt. And they're never quite sure if we're going up or down to begin with, so it's hard to know which way to push the economy. Even so, it works pretty well, and they judge good most of the time.

However, I was wondering if instead of manipulating aggregate demand, which is kind of superficial and actually has no long term impact, if they could manipulate something else. And the number of hours in the work week seemed like a good thing. It's targetting the real issue of unemployment when people don't want to buy stuff. You'd take a hit in terms of overall productivity - because I suspect that for a single worker there are increasing returns to scale - but there's nothing saying that 40 hours is optimal. Maybe 20 hours really is. Maybe 80 hours a week is. 40 hours a week isn't a historical number. There isn't really an optimal number anyway. Also, if you made even a tiny dent in cyclical unemployment you'd get huge productivity gains, which would probably compensate.

You'd have problems with family budgets, because real income would fluctuate a bit. But banks could base their home loans on the minimum hours per week. Which might be 35 hours or something, so people wouldn't get stuck with home loans they couldn't afford. And even if the government phased each shift in gently. Over 6 months or so, I reckon you'd still get a much faster response to the input than with other methods. I suspect that workers would be faster to react to obvious changes in income than investors are. Investors are always making long term choices, because they're dealing with large chunks of money at once. Workers deal with smaller amounts, so it doesn't matter so much if they misjudge the economy. It doesn't matter at all really. So while there is unemployment the government could push towards fewer hours a week. And when there are wage rises, the government could increase the hours per week.

It seems that if people stop buying stuff then the best solution isn't necessarily to convince them to buy more. The obvious other option is to let them work less.

The unions would love it I reckon, because there'd be less unemployment and in the aggregate, workers aren't losing anything. Business would probably like it, because it reduce upward wage pressures and overtime costs during periods of strong economic growth.

In economicky language you'd be letting the government fiddle with the long run aggregate supply curve, to minimise the impact of the business cycle on employment levels. There's a the chance that you'd get problems with the government running out of hours to reduce, but they'd just have to budget their increases and decreases over the expected length of the business cycle, which isn't that long anyway.

There's a whole other interesting thing of how to distribute income, and the impact of the size of income chunks on the the outcome of monetary and fiscal policy. Funnily enough I reckon that the apparent "naive" decision-making on non-investors is actually more realistic than the clever investor growth predictions. Growth predictions are self-fulfilling prophecies. If your lifestyle and income makeup allows you to make decisions week to week (workers), rather than year to year (investors) then good for you. And, perhaps more importantly, good for the economy and the size of recessions.

Which leads me to the next obvious conclusion, which has been staring me in the face for months. Capital is shit. It's an artefact of inefficient information distribution and will one day hopefully die. Educated workers with access to information are far more flexible and therefore far more efficient at allocating income than investors, who can't afford to be wrong.

It's like "Where do butterflies go when it rains?" Where does the money go when the economy crashes? I reckon investors whack it into low risk portfolios which ends up as gold sitting in a vault, which is what kills everything. Saved up usefulness - which is what money really is - isn't meant to sit a vault. I would reckon that workers don't stick their money into vaults at the same rate investors do. When profit expectations drop, workers go and buy a meat pie instead of investing it. But investors stick it in a vault, because it's not their money so they can't buy a meat pie with it. And even if it was their money, they wouldn't spend it on pies, because they've got far too much money and nobody needs that many meat pies.

So, death to capital! Long live capitalism!

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