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Two definitions

Summary:
From Peter Radford Are economists so befuddled by the elegance of their machinery that words have lost all meaning? Two definitions, one for ‘essential’ and the other for the way in which, according to economics, people are rewarded for their work. In recent weeks we have become accustomed to calling someone an ‘essential worker’.  These are our most important people.  They are, if the dictionary doesn’t lie, indispensable.  They are extremely important.  They are key, crucial, vital, and needed.  They sound pretty darned special to me.  They must be doing things that, were they not doing them, would bring the economy to a screeching halt. My goodness, they must be paid a lot.  Surely anyone who is a vital cog in the machinery is paid commensurately with that importance. Not really.

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from Peter Radford

Are economists so befuddled by the elegance of their machinery that
words have lost all meaning?

Two definitions, one for ‘essential’ and the other for the way in which, according to economics, people are rewarded for their work.

In recent weeks we have become accustomed to calling someone an ‘essential worker’.  These are our most important people.  They are, if the dictionary doesn’t lie, indispensable.  They are extremely important.  They are key, crucial, vital, and needed.  They sound pretty darned special to me.  They must be doing things that, were they not doing them, would bring the economy to a screeching halt.

My goodness, they must be paid a lot.  Surely anyone who is a vital cog in the machinery is paid commensurately with that importance.

Not really.  Not at all for most of them — the exception here in the U.S. being doctors.  No, most of our ‘essential workers’ are amongst our least well paid.  They cannot afford to live in the cities or towns where they do their essential work, so they commute and thus expose themselves to the risk of contracting the virus that is our current scourge.  They certainly aren’t paid for that risk, no matter what the finance textbooks tell us about risk and reward. Apparently only the ‘risk’ managed by hedge fund mangers and their ilk matters, even though it turn out they aren’t essential at all.  Instead they sit safely ensconced in their second or third homes, or on their yachts, moving paperwork from one side of the desk to the other, and getting paid very nicely for all that incredible effort.

Economists tells us that people are paid for what they produce ‘on the margin’. Indeed, marginal productivity, as this particular piece of economic fiction is called, is fairly uncontroversial even among the so-called progressive economists. John Bates Clark describes for us the effect of this oddball idea:

“the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates”

It’s a natural law!  It sounds pretty sensible too: you get out what you put in.  Sort of.

And it seems to imply that economic theory is comfortable with our most essential workers not adding much to our collective wealth.  Whereas hedge fund managers on their yachts moving paperwork around do.

Which is upside down.  But that’s not unusual for economics, whose most ardent practitioners take a particular delight in being counter-intuitive.  So, whereas those of us poor souls who think words have regular meanings would think that essential workers are those who are adding the most value, economists and their more irregular meanings don’t think that at all.  Isn’t this counter-counter intuitive?  Are economists so befuddled by the elegance of their machinery that words have lost all meaning?

Marginal productivity only exists in order to establish a ‘natural law’ to frighten workers into believing that they have to settle for poor wages — who can overturn a natural law?  The fact that society sees some workers as essential doesn’t matter to economists.  What matters is preserving a variety of interlocking intellectual marvels so that their Ptolemaic apparatus doesn’t implode.  That this produces circumstances where essential seems to mean trivial rather than vital is not an issue.  The goal is to preserve the machinery, it is not to make sense.

So one of the bedrocks of economic theory says that our most important workers are doing something that adds little to no value.  They are essential but, well, not essential.  They are hugely important to the workings of the economy, but ought be poorly paid because of their insignificance.

Am I the only one to find this odd?  I must have missed something really counter-intuitive.

Maybe it’s the pandemic playing with by mind.

And, don’t get me started on ‘revealed preference’!  We can laugh at that another day.

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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