Cleaning House

I’m currently working at a medium sized fund before taking a big career step in a few months. I’m part research analyst, part computer programmer for them.

It’s really clear to me that a lot of the coding I’m doing is so that they won’t have to hire someone as quickly to replace me. Where as in the past they would have some some kid cranking all night on the research half of my job, the stuff I’m producing for them makes it a lot more likely that, depending on what they want, they can instead just open a file, click a button or two, and have an up-to-date report ready to go.

Its interesting to see an improvement in technology increasing the marginal return to labor and simultaneously reducing their demand for labor.

The question is; why is a production function that involves a tfp parameter that effects the capital/labor allocation so rarely seen (non-existent?). It would seem like a pretty useful way to understand what we’ve seen in real wages and productivity over the last fifty years. Productivity goes up, wages and employment go down because the labor share of production goes down.

Setting wages equal to the marginal product of labor is more than just intuitive, its essential to the current methods used in macro. It’s pretty hard to define an equilibrium if your economy drifts towards N=zero.

I don’t know much about the history of the Cobb Douglas production function but its amusing that while modeling today makes such a big deal about micro foundations, the CD production function is essentially a Social Planning Emperor who isn’t wearing much clothing, if any at all. Its popularity has to have something to do with ease of use, no?

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Tendencies Toward Entropy

It’s pretty clear to see that, for better or worse, governments are more than willing to expand their power, but are generally uncomfortable dismantling any pieces of themselves.  Even politicians elected on their promise to reduce the size of government ultimately expanded their powers when faced with such a decision.

This is the obstacle to the Chinese movement from market forces as a “basic” influence in the economy to a “deciding” influence. If you’re someone with a life-long confidence in your own ability to solve problems as the brilliant technocrats managing the Chinese economy certainly are, its pretty  difficult to rely on anyone else, let alone “market forces” to solve what is a fairly urgent dilemma for the Chinese economy. On the other hand, the retarding lead isn’t a factor in China the way it is in the US.

Reuters‘ has a decent barometer for the success of this year’s plenum over the next few years. Each point in that article involves the government reacting to adverse economic conditions by relinquishing control of the market. Difficult to imagine.