Monthly Archives: May 2012

“The Austrian Theory of the Trade Cycle”

The Austrian business cycle theory (ABCT) was swept away by the Keynesian revolution in macroeconomics. There were several reasons for this: Keynesianism did away with the mathematically intractable and complicated Austrian capital theory, opening up macroeconomic analysis to systems of equations and graphs which were easily solved and understood. Much of the economy was reduced to incomes and expenditures and the psychological factors which have a hand in driving them. Such ease of exposition led to perhaps the most important reason for the Keynesian system’s success: it told politicians that what was needed of them was what they already desired to do, which is lead the economy through spending, easy credit, and manipulation of the money supply.

An understanding of Keynesianism is necessary to understand the government’s actions in the economy, but it is not sufficient to understand the results of these actions. For this we need a richer theory which does not shy away from the difficulties of capital theory and intertemporal economic coordination. What is lost in mathematical precision will be more than gained in an understanding of the distortions caused by economic intervention.

“The Austrian Theory of the Trade Cycle” provides an overview of Austrian business cycle theory with essays from Ludwig von Mises, Gottfried Haberler, Friedrich Hayek, and Murray Rothbard, and an introduction and a final summary by Roger Garrison, a leading Austrian macroeconomic theorist today.

Ludwig von Mises’ “The Austrian Theory of the Trade Cycle” (1936)

Mises starts his essay with a description of the English Currency School’s (ECS) theory of trade cycles. The ECS’s theory focuses on unbacked credit expansion through bank notes, but neglects the similar problems caused by the existence of bank current accounts which can be drawn on at any time. The ECS favored legislation restricting unbacked bank notes, which they got with Peel’s Bank Act of 1844. This law, which left unbacked current accounts unhindered, failed to stem future crises and wrongly led to a discrediting of monetary theories of trade cycles.

The ECS also analyzed the effects of credit expansion in one country only, where its trading partners maintained tight credit policies. While useful, this needlessly restricts the theory to foreign trade effects, leaving the situation of simultaneous credit expansion among many countries out of the analysis. The theory goes like this: easy credit leads to rising domestic prices, causing imports to rise and exports to fall. Metallic money flows out of the country, domestic banks must repay the unbacked notes they have issued, causing them to restrict credit, which together with the outflow of metallic money causes domestic prices to fall.

Mises now proposes a theory with some similarity to the ECS, but without its limitations. Here, unbacked bank notes and current accounts, known as fiduciary media, allow banks to extend credit far beyond their assets and deposits. This lowers the money rate of interest below the natural rate, so the “hurdle rate” for business projects falls and more activity begins, with an increase in the demand for and price of capital goods and labor. Consumer goods prices then rise, signalling businesses to start more projects, which must also be financed with unbacked bank credit.

Capital goods and labor have, however not increased in quantity, so the increased activity must divert these resources away from activities which would have otherwise gone on in the absence of credit expansion. This means that consumer demand and business production have diverged during this credit induced boom.

As people begin to accept that money inflation and rising prices will continue, they quickly begin to exchange their money for goods as an inflation hedge. Commodity prices rise as the currency’s exchange value falls, and the boom accelerates. Even though nominal interest rates are rising at this time, due to inflation, real rates are not high enough to slow the boom phase.

If at this point the banks decrease the availability of credit in order to avert a currency collapse and to stop the boom, then the bad investments undertaken in the easy credit environment will be exposed and will be halted or liquidated, causing prices to crash and a depression to follow. As credit is restricted, interest rates rise as the economy is braked, then fall during the depression, but are ineffective in stimulating the economy. Cash reserves held by fearful banks, businesses, and individuals grow as the depression continues.

Wages rose rapidly during the boom phase and should fall now with the prices of the other factors of production in nominal and real terms. The trade unions, however, prevent this natural equilibrating process, extending unemployment by pricing labor out of the current market and preventing a natural fall in goods prices in accordance with the new, smaller money supply.

The banks face a decision of when to restrict credit to end the unsustainable boom. The longer it continues, the more bad investments take place, and the longer the period of adjustment and depression will be that follows. It is often suggested that the economy should be “stimulated” at this time by lowering interest rates, which can only temporarily relieve the current conditions but will cause worse problems in the future. The pain during the readjustment period cannot be avoided.

Ron Unz’s “China’s Rise, America’s Fall”

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The American Conservative recently ran an article by Ron Unz which is a response to Acemoglu and Robinson’s “Why Nations Fail”, which argues that China’s growth will falter and America’s will resume because of the corrupt, “extractive”, one party rule in China versus the open, democratic rule of the benign American bureaucratic State.

Criticism of the American system of government-big business-bank partnership, in other times and places called fascism, has for too long been the exclusive domain of leftists, with soi disant conservative publications mocking any criticism of the corrupt symbiosis of government and the corporate world, especially “conservative” corporate sectors like weapons manufacturers and private prison operators. Defense. Law and order. Those are conservative values, right? Who other than a liberal would be against them? So it is good to see a magazine with the word “conservative” in its title actually criticize our corporate welfare state.

Unz documents the rapid growth of the Chinese economy against the stagnant American median incomes of the last 40 years, and lists several areas where the Chinese have surpassed American business. Despite this, China’s rise does not need to be seen as a threat since the global standard of living is increased by Chinese production.

Of course, China has its share of corruption and social problems with such a quick ascent, but this is a lot easier to take when real per capita income has risen by over 1,300 percent in 30 years. The stagnant American worker seems much more resentful of his elites.

While China’s masses are benefiting from this progress, the United States is becoming more unequal, with the top one percent controlling about as much wealth as the bottom 95 percent. The Chinese and American Gini coefficients are about equal now, and moving in opposite directions. Thirty five percent of the last few years’ economic recovery in America has gone to the top .01 percent. The government-corporate partnership funnels money upward.

The central message of the article is this:

“…although American micro-corruption is rare, we seem to suffer from appalling levels of macro-corruption, situations in which our various ruling elites squander or misappropriate tens or even hundreds of billions of dollars of our national wealth, sometimes doing so just barely on one side of technical legality and sometimes on the other.

Sweden is among the cleanest societies in Europe, while Sicily is perhaps the most corrupt. But suppose a large clan of ruthless Sicilian Mafiosi moved to Sweden and somehow managed to gain control of its government. On a day-to-day basis, little would change, with Swedish traffic policemen and building inspectors performing their duties with the same sort of incorruptible efficiency as before, and I suspect that Sweden’s Transparency International rankings would scarcely decline. But meanwhile, a large fraction of Sweden’s accumulated national wealth might gradually be stolen and transferred to secret Cayman Islands bank accounts, or invested in Latin American drug cartels, and eventually the entire plundered economy would collapse.

Ordinary Americans who work hard and seek to earn an honest living for themselves and their families appear to be suffering the ill effects of exactly this same sort of elite-driven economic pillage. The roots of our national decline will be found at the very top of our society, among the One Percent, or more likely the 0.1 percent.”

Corruption

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The difference between corruption in developing countries and the U.S. lies in its scale and sophistication. Latin Americans, for example, have to deal with small levels of corruption in their daily lives, whether it is from the police who stop them for made up offenses or local politicians demanding bribes from small businesses. But corruption in the U.S. is so large and so sophisticated that it is often hidden in plain sight.

Special interests use political connections to force American taxpayers to buy goods and services they would never purchase if left to themselves. One man who both profits and has the inside political connections is Michael Chertoff, who headed the Department of Homeland Security under George W. Bush. Chertoff was helping the American public to understand the threats to their safety today on Fox News after vague news of another underwear bomber was released by the government. He appeared very serious and dour, obviously concerned over the grave dangers facing this country.

But wait: it appears that Chertoff could benefit from the grave danger and resulting fear. His consulting firm, the Chertoff Group, represents one of the makers of full body scanners. An amazing coincidence.

The size of the U.S. prison population has been in the news recently, which brought to mind the story of the California prison guard union’s actions a few years ago. They gave $1 million to defeat a measure that would have reduced marijuana possession sentences. More people to guard means more guards. And they are only number five on this list of lobbyists against marijuana decriminalization.

Any understanding of a modern economy under a managerial bureaucratic government such as that ruling the U.S. must incorporate an analysis of this kind of corruption. The American economy of today is greatly distorted by this kind of political rent seeking and the actions of the Federal Reserve in service of its Wall Street masters, whose power over government and the economy makes body scanners and prison guards look insignificant. A great overview of the control that Wall Street banks have had over the U.S. government and the amazingly small circle of players involved in this control, over both Democrats and Republicans, is available in Murray Rothbard’s Wall Street, Banks, and American Foreign Policy. This is a must read which serves as a guide to further research where the wars, assassinations, invasions, loans, the subsequent bailouts of the recipients of those loans by the American taxpayers, and foreign policy of the U.S. government are put in the analytical framework of who benefits from government actions. Lenin’s “who-whom?” is alive and well in the USA, and we can see who is doing what to whom.

Inflation and Capital Consumption

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Inflation has many negative, often unnoticed, consequences for an economy. This is one example from Rothbard’s Chapter 12, which deals with credit expansion and business cycles, of Man, Economy, and State. Businesses can unknowingly consume their capital in an inflationary environment. Capital goods purchases are recorded at cost. When finished goods are sold later, they are recorded with an inflationary gain. The seemingly profitable business might consume the profits they believe have been earned above what they need for capital replacement. However, when it comes time to replace the capital, it will also be inflated and the business will realize that its profits were illusory, and it had unwittingly been consuming its capital.

The recent housing boom provides a good example of capital consumption. Home prices soared, causing American homeowners to feel wealthier. They used this wealth to finance purchases of consumption goods, much of them imported. When housing prices fell, people realized they had been fooled by the effects of monetary inflation on the housing markets and had been consuming capital all along.

This illustrates the importance of capital theory in any understanding of the way manipulations of the supply of money and credit can cause relative distortions in the capital structure. In a world free of government and bank credit manipulation, the capital structure would be arrayed in conformity to society’s time preferences, where any investment would have to be financed through saving, which means putting off consumption now for more consumption in the future. The ratio of the price of current goods and future goods provides the natural rate of interest and is a direct result of the collective time preferences of consumers, savers, and investors.

When interest rates and the supply of money are manipulated, people are fooled into thinking that they are richer and can afford to spend more when their assets rise in value, when in reality they are increasing their time preference by consuming their capital. This is the economic boom period. The bust follows when assets must be liquidated in order to finance the increased consumption brought on by the illusion of prosperity.

Methodology

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As mentioned in the previous post, Post Keynesians argue with mainstream economists (Neoclassicals, New Keynesians, etc.) over the ergodicity assumption in mainstream models. The ergodicity of economic data is, however the wrong argument to be having because it presumes the use of improper tools for economic analysis.

Ergodic processes allow their parameters to be deduced from a statistically significant sample of data. Human action, or any subset of it, does not have constant parameters because humans are not predictable in the way that particles, for example, are, due to subjective and ever changing preferences. Particles in water or moons orbiting a planet are ergodic, human behavior is non-ergodic.

Put another way, non-ergodic processes are path dependent, meaning their history, the path the system took to reach its current state, has some bearing on its future development and that there are many possible equilibriums for a system. This seems to be a valid assumption and provides an important place for the history of economics. Mainstream theory denies path dependency and places man, at least in its method of analysis, in the realm of automatons or particles, always seeking some predetermined, “natural” equilibrium. Mainstream economists want economics to be a quantitative discipline like the hard sciences, devoid of historical analysis.

This application of mathematics to the study of human action leads to many problems. The Post Keynesians take the non-ergodicity of human action a step further and proclaim that ontological uncertainty exists in economics, a philosophical step towards nihilism where even the use of general economic axioms is questioned. The possibility of economic coordination would even be in doubt.

The mainstream economists deny the existence of ontological uncertainty and maintain that the goal of economics is to reduce our epistemic uncertainty through the use of better models containing better mathematical techniques.

Both sides are wrong: the Post Keynesians in their flirtation with nihilism and the mainstream with their belief in the resolvability of the problems with mathematics.

There is another way, however, which does not rely on mathematical techniques and in which the problem of ontological or epistemic uncertainty does not even need to be decided. Whether or not future psychologists will be able to predict human behavior, whether or not free will exists, is not important now. Extreme uncertainty, not the mild uncertainty of a random walk, exists for us now, regardless of our future ability to tame it (doubtful though this is, and undesirable as it would reduce man to a predictable physical process).

The Austrian School uses deductive, a priori reasoning as the only valid means of coming to certain conclusions regarding human action, and an Austrian view of uncertainty is described in Chapter 6 of Mises’ Human Action. Class probability, where the frequency of a large number of events is used to assign a probability on future events, is applicable to many areas of the natural sciences, despite its use by mainstream economics. Case probability, where each event is unique, is not open to numerical analysis, since some or all of the relevant factors are unknown, but is the proper method of analyzing economic events.

The outcomes of some types of human action are able to be known with certainty, though not with mathematical certainty. The law of supply and demand holds, but the magnitude of the change in one due to a change in the other remains unknown. Constant relations do not exist, utility curves are not continuous, and a change in one factor can change the relative positions of many other factors. The use of mathematics in these questions adds nothing to our understanding of economics. Instead, it can be harmful by providing a false sense of scientific certainty where none can exist.

Sources

http://ineteconomics.org/blog/inet/paul-davidson-response-john-kay

http://www.econlib.org/library/Mises/HmA/msHmA6.html

The Keynesian Fight Over the Proper Keynesian Policies

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The intra-Keynesian fight over correct macroeconomic policy is a good lesson in the importance of epistemology in economics. A good overview of the current debate is presented here. Basically, mainstream Keynesians like Paul Samuelson and Paul Krugman are accused of combining Keynes’ ideas with neoclassical thought and producing a watered down version which is devoid of the insights which made the Keynesian theory valuable in the first place. These modern Keynesians, according to the true believers, incorrectly believe that the market system is basically efficient and only needs tweaking by government action to remedy such features as sticky wages in order to fix a recession, which should be done by government deficit spending and easy credit, in that order.

Paul Davidson, leading Post Keynesian, in his book “The Keynes Solution: The Path to Global Economic Prosperity”, says that the crucial insight in Keynes’ General Theory is that uncertainty causes people to hold cash at a level that causes demand to fall, resulting in an equilibrium with unemployment, described here. Unlike Samuelson and Krugman, who believe markets to be for the most part efficient, Davidson follows Keynes in seeing uncertainty as a permanent negative force on an economy. Keynes also alleges that financial markets and investing are less based on rational analysis than they are on emotion or “animal spirits”. These two factors are the reasons investment should be socialized.

Now we reach the epistemology. The modern Keynesians and neo-classicals believe that accurate spot and futures markets exist, and that the past and present can be used to predict the future, what they call the ergodic principle. The beginning of the Wikipedia article on ergodicity says all we need to know about the problems with current macroeconomic epistemology:

“In mathematics, the term ergodic is used to describe a dynamical system which, broadly speaking, has the same behavior averaged over time as averaged over space. In physics the term is used to imply that a system satisfies the ergodic hypothesis of thermodynamics.”

Human beings’ economic behavior is assumed to behave like inanimate particles, which obey known statistical properties. Unfortunately, humans act in accordance with no known statistical distributions and with no fixed correlations or magnitudes, making predictive models impossible and any policy prescriptions based on those models suspect. Modern Keynesians like Samuelson believed in ergodicity, a mild, understandable randomness with known parameters.

Keynes disagreed with this and saw uncertainty everywhere. People sensed their inability to predict the future and this kept them from investing in long term projects. Demand falls, conditions worsen, people hold even more cash to guard against uncertainty, and the economy spirals down. At this point, the government must start making up for the lost demand by deficit spending. As demand picks up, investment will increase and the economy will improve. So sticky wages or the money illusion are not the main problems in this higher level of Keynesian analysis. It is the uncertainty and fear of investors which is at the root of low demand. Constant government pressure must be maintained against the under-investment due to uncertainty, which is lost on the modern Keynesians who advocate action only in the face of recession.

Currency Wars, Seen and Unseen Consequences, and the Difficulty in Predicting Them

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James Rickards in his book “Currency Wars” describes the ongoing struggle between governments to weaken their currencies, and focuses on what he calls the three “supercurrencies”, the dollar, yuan, and euro. Rickards identifies three theaters of this war, the Asian, the Eurasian and the Atlantic theaters. The participants in this war go beyond the respective central banks to include the IMF, the World Bank, the BIS, the UN, and banks, hedge funds, politicians, and MNCs. The current currency war is called Currency War 3, and is following the two previous wars of 1921-1936 and 1967 -1987.

The Asian theater is being fought between the U.S. and China and is considered to be the main front in the various currency wars today. The yuan was seen to be overvalued against the dollar up until 1983, when it stood at 2.8 yuan to the dollar. This allowed the growing Chinese economy, which did not yet have a large export component, to import capital goods for the creation of a modern infrastructure. As the time came for exports to form a larger part of the Chinese economy the yuan was gradually devalued against the dollar so that, by 1993, the exchange rate was 5.3 to the dollar (compare this deft move to the disastrous Import Substitution Industrialization policies in Latin America). On January 1, 1994, China devalued the yuan to 8.7 to the dollar, causing the U.S. Treasury to label China a currency manipulator. China, for its part, seems to be more concerned with the millions of workers it has which are dependent on export based jobs and the political instability which would result if unemployment sets in.

China, eager for cover to control its own Muslim population, supported the U.S. “War on Terror”, which thawed relations between the two countries and allowed an expansion of what Rickards calls investment codependence. This time also saw the initiation of the Fed’s policy of low interest rates, which began in 2000 after the Tech Bubble collapse, where the fed funds rate fell 4.75 percent from July 2000 to July 2002. The fed funds rate stayed below 1.8 percent until October 2004.

Greenspan feared deflation, which he saw as being caused by, among other things, China’s exportation of low prices allowed by their cheap labor. These low rates also made otherwise marginal investments appear attractive and caused investors to look for yield in riskier places, including the sub-prime real estate loan market and the commercial real estate market, setting off the real estate bubble of 2002-2007.

Ben Bernanke, who advocated the Treasury issuing debt financed by Fed money printing for the purpose of buying the stock of private companies and a broad tax cut financed by money creation as a way to stimulate the economy, was appointed to the Fed Board of Governors in 2002. Bernanke feared deflation as much as Greenspan did and proved a strong ally.

The U.S.-China trade deficit, which was at $50 billion in 1997, had grown to $234 billion by 2003, when concern about the effects of the weakness of the yuan began to intensify in the U.S. As mentioned above, low Chinese labor costs are exported to the U.S. and cause fears of deflation. Newly printed dollars, hoped to create inflationary pressure by the Fed, are instead held by the People’s Bank of China as reserves, which acts as a way of China absorbing U.S. inflation. The dollars are bought with newly created yuan. This move allows the Chinese to keep the dollar strong and the yuan weak and thwarts the Fed’s attempts at inflation. Since the PBOC prints yuan to buy newly printed dollars, it has in effect decided to follow the Fed’s monetary policy. The PBOC, looking to earn a yield on its dollar reserves, buy U.S. Treasuries, and owns close to one trillion dollars of these securities. These purchases also help keep U.S. interest rates low and allow borrowing to continue, which is in China’s favor.

As the American economy began to decline and the Greenspan/Bernanke easy money policies were no longer able to hide the problems in the U.S. economy, American politicians began to blame China for stealing U.S. manufacturing jobs. Responding to pressure from the U.S., China allowed the yuan to strengthen from 8.28 per dollar in 2005 to 6.29 per dollar today. With employment concerns in both the U.S. and China, the currently quiet currency war could come back to the surface at any time.

What could the unseen consequences of all this manipulation, from both sides, be? China’s economy has obviously been skewed towards mass production for the foreign, largely American, market. This has not taken place due solely to comparative advantage but to a weak yuan/strong dollar policy by the Chinese. China would be in a precarious position if U.S. demand for Chinese goods dropped, whether due to changing consumer preferences or to U.S. protectionist policies. In contrast, the American manufacturing sector has been sent offshore, where cheaper labor and less stringent regulations are to be found and from whence cheap goods can be imported with a relatively strong dollar. So the U.S. is also in a dangerous place. Both the U.S. and China have made their economies less robust, the Americans with a less diverse economy and the Chinese with an export/weak currency dependent economy (the Chinese economy is not less diverse because it was starting from such a low point).

How to take advantage? Some say to buy yuan, since it is “obviously” undervalued and has to go up at some point. Unfortunately “obviously” undervalued assets are not always obvious to others; just ask me and my fellow TBT investors.

Keynes on Effective Demand and Unemployment

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Keynes defined effective demand to be the income from production where aggregate supply (total expected income required to hire some number of workers) equals aggregate demand (total expected income due to hiring that number of workers). Keynes says that effective demand could be in equilibrium with large scale involuntary unemployment. This is where the General Theory comes in (so named to be compared with Einstein’s generally valid relativity as against Newton’s more special case of mechanics. Keynes was trying to say that Classical economics, which focused on the distribution of given output, was only valid in the special case of full employment. The General Theory broadened the scope of analysis to the laws of the size of output). If effective demand is in equilibrium with involuntary unemployment, then the classical view that workers supply labor up until the disutility of labor equals the utility of the wage is only valid in the “special case” of full employment, not in general. Effective demand is at this point because consumer demand and investment is too low for the employment of all available resources.

Keynes believed that effective demand with involuntary unemployment disproved Say’s Law, which he took to mean that aggregate supply and aggregate demand will be equal and that this would occur with full resource employment. Say actually says that production leads to the ability to demand. Something must be created in order to exchange it for something that someone else has created. This is easy to see in a barter economy, but the issue becomes more complex in a money economy with wage labor.

How did Keynes propose to break out of the trap of effective demand equilibrium with unemployment, an equilibrium which perpetuated a cycle of underemployment and underinvestment? He focused on the marginal efficiency of capital, or IRR in modern terms. Capitalists would borrow money to buy capital goods until the point where their marginal efficiency equaled the interest rate. Keynes argues that the interest rate should be pushed down, approaching zero, in order to induce more capital investment, increasing the price of capital, and the marginal efficiency of capital would approach zero (Keynes, and modern neo-classicals and New Keynesians, interestingly consider capital to be a homogeneous stock of goods. Therefore capital is spoken of in general and in the aggregate and “its” marginal efficiency can approach zero).

This is where Keynes’ famous “euthanasia of the rentier” comes in. Since investment has been socialized, the capitalist class which has benefited from the scarcity of capital by renting it out will be done away with. Investment capital will be made available at zero percent interest, capital goods will be bought, and a new effective demand equilibrium with full employment will be reached.

Keynes versus the Classical Economists on Involuntary Unemployment

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Now let’s move from a barter to a money economy. Instead of direct exchange of goods, a medium of exchange is used for transactions. Saving and borrowing take place. Is this system more likely to break down and require the help of experts? Money has its own supply and demand, its own objective value based on how many other goods it can exchange for, and each actor in the system places a subjective valuation on money. Like all other goods in which he deals, each person chooses to hold some money in his inventory or to trade it for other goods. This could be due to his expectation of the future value of money, his desire for other goods than money at the moment, or because he prefers the increased optionality that holding money gives him and which holding other goods does not. Regardless of the reason, as more people hold money, the scarcer and more valuable it becomes, and the more people are willing to pay in interest to borrow it. The interest rate is always moving to coordinate the supply and demand of money loans.

How is the money interest rate set? It is based on the natural rate of interest, which is the difference in the price of a good today versus its price at some time in the future. If someone can borrow $100, buy raw materials, convert them into a finished good which can be sold in one year for $110, he will pay up to 10% interest for that loan. The market for money and the information it conveys allows for the supply and demand of other goods to tend toward equilibrium. The existence of money in an economy allows for an increase in the division of labor, as some people will choose to exchange their labor for money instead of producing an entire good on their own. This allows for greater specialization and it increases efficiency, so this would not seem to be a destabilizing force necessitating the benevolent wisdom of our deus ex machina.

It is at this point, where some people exchange their labor for money, when they become employees of other people, that some say that breakdowns can occur and intervention can become necessary. It is widely agreed that the money paid to the person in exchange for his work is equal to the marginal product of his labor. It is also contended that people, specifically workers, will supply their labor until the disutility of one more unit of labor equals the utility of the money received, the wage.

Keynes’ General Theory

John Maynard Keynes disagreed with the second contention, and said that if this were so there would be no involuntary unemployment. Keynes’ opponents said large scale involuntary unemployment would only exist if real wages were kept artificially high by unions of workers or by governments. Keynes responded that workers suffered from a “money illusion”, meaning that they did not care much about real wages and instead focused on nominal wages. So even if prices of consumer goods were falling, and real wages were rising, workers would only see the stagnant or falling nominal wages. Keynes also argued that workers would not be able to affect their real wages much anyway, since their agreed to lower nominal wages would lead to a fall in prices and thus unchanged real wages (although the fact exists that wages make up only a part of production costs). Involuntary unemployment would exist, said Keynes, if consumer goods rose relative to nominal wages, in other words if real wages fell, and the supply of and demand for labor increased.