Economics Lessons from the Kibbutzim

In March 2023, I visited Ma'agan Michael Kibbutz and had a meeting with a former Israeli government official charged with managing the government bailout of about 200 kibbutzim.  Both offered empirical lessons about the challenges of communal living.

 

Background and Description

Ma'agan Michael was one of the few kibbutzim not bailed out.  It is one of the wealthier and more populous kibbutzim, with approximately 2000 residents. (Kibbutzim is the plural of kibbutz, which is described in more detail below but might be briefly described as a voluntary socialist community in Israel.)

 

In an earlier era, this kibbutz and the others followed a more egalitarian model.  For example, children were once raised communally in dormitories and would visit their biological parents for only three hours each day.  This alone was a big sacrifice for families for the sake of ideology, not to mention harmful actions that adults might occasionally take against children knowing that their parents were not around.

 

Now nuclear families live together in their own residence.  Every family receives an income that varies only according to the age and structure of their family.  As of 2023, that was about $3,500 per month.  Dining and laundry are in common. Rent, healthcare, formal education, and those two services are "free" -- not taken out of the $3,500.  A family can purchase and own household appliances for their residence.  Some get a washer and dryer because the community laundry takes too long.

 

Part of the kibbutz is something like a car rental agency.  They have a fleet of cars.  A central office holds the keys.  A member could pick up a car key and use a car for the day.  I believe that this was charged against their $3,500. Much of the accounting is done on computer with a fab system.

 

Some of the members are employed outside the kibbutz, but nonetheless must surrender all of their earnings to the community.  A partial exception would be earnings during periods of sabbatical.  One three-year sabbatical is permitted per lifetime.

 

Forty-five hours per week of work is required from all adults, with some categorical exceptions.  Mothers are required only 37.5 hours per week.  Retirees do not work at all; their Israeli-government pensions go to the community.

 

More than 90 percent of the land in Israel is government land, including the land allocated to Ma'agan Michael since at least the 1940s.  It is a prime seaside property, as you can see in this photo.  They once fished in the Mediterranean but now operate a couple of different kinds of fish farms on their property.  They also have a couple of factories for manufacturing.  The plastics factory they founded in 1963 has annual sales approaching $100 million, which helped them avoid the financial crises experienced by most other kibbutzim.

 

 

The common areas of the kibbutz can be compared to a college.  The dining room resembles the college cafeterias from my own college days, which are not as upscale as modern college dining facilities.  The grounds are less neatly kept than college campuses are (the beach photo is not typical in that regard).

 

Problems with communal living, even on a small scale

 

As Ran Abramitzky discusses in his book The Mystery of the Kibbutz, and labor economists have observed with employment contracts, work effort can be a problem when pay is not tied to performance.  The kibbutz, where members have often known each other since birth, tries to police this by watching each other.  They can expel a member from the kibbutz for poor performance, which is a serious punishment.

 

The kibbutz also looks hard at the work ethic of persons applying for membership.  However, membership in the kibbutz is voluntary, and individuals cannot be compelled to stay.  The most productive members have a significant financial incentive to leave.

 

Perhaps a more serious problem is occupational choice and human capital accumulation.  With uniform pay, members have little financial incentive to excel in their jobs, particularly in roles they find unfulfilling.  While the kibbutz covers the cost of formal education, much of human capital development in conventional labor markets occurs after formal schooling is completed.

 

Too much is democratized on the kibbutzim.  First, there is the challenge of reaching agreement, leading to significant and frustrating indecision.  Second, incentives are lacking to acquire and utilize information relevant to collective decision-making.  An individual could work hard to determine the right answer, but his vote hardly counts.

 

Financial decisions are a prime example.  Few kibbutz members have an incentive to learn about, say, present values.  About fifty years ago, numerous kibbutzim initiated projects that seemed viable if the time value of money were ignored, but were big losers from an NPV perspective.  The abundance of failures among those projects was a major reason that kibbutzim would later be bailed out.

 

Equality, including gender equality, was an important ideal of the early kibbutzim and, to a large extent, still today.  Nevertheless, despite the ideology, gender segregation by occupation seems just as strong as it is off kibbutz.  All but one of the laundry employees I saw were female.  All of the tractors and heavy machinery were operated by men.

ChatGPT: Marshall, Hicks, or Cliff Clavin?

Marshall discusses his Laws of Derived Demand in his Principles of Economics.  Specifically, in Chapter VI of Book V.

Marshall listed four “conditions” that result in wage-inelastic derived demand for the corresponding factor of production:

1. “no good substitute being available at moderate price”

2. “stiff and inelastic” final demand

3. “small part of the expenses of production” (i.e., small factor-cost share)

4. Inelastic supply of other factors

Putting aside the fourth law, we can discuss the first three in the context of the Allen-Hicks formula for the own-price elasticity of derived demand, βii, in the two-factor case (see also Chicago Price Theory Chapter 11).

where si is good i’s share in factor cost, εD < 0 is the price-elasticity of demand for the final product, and σ > 0 is the elasticity of factor substitution.  None of these parameters are necessarily constants; they may vary according to the factor allocation.  Marshall’s first law can be understood as a comparative static with respect to σ in the direction of zero, holding constant si and εD.  The second law can be understood as a comparative static with respect to εD holding constant si and σ.  The debated third law is a comparative static with respect to the share parameter, with Hicks at least holding constant εD and σ.

ChatGPT confidently asserts that there are three Marshall’s Laws.  Three is a fair count if we exclude the law that Hicks disputed.  However, by that count, ChapGPT gets them 5/6 incorrect.  Instead, it lists the definition of derived demand, followed by a statement about long versus short run.  The third in its list is perhaps a combination of the disputed third law and the first law.

Mulligan: What are Marshall's Laws of Derived Demand?

ChatGPT: Marshall's Laws of Derived Demand are a set of principles that describe the relationship between the demand for a particular factor of production (such as labor) and the demand for the goods and services that factor helps produce. These laws were developed by economist Alfred Marshall in the late 19th century and are still widely studied and referenced today.

The three laws of derived demand are as follows:

1. The demand for a factor of production is derived from the demand for the product that the factor helps produce.

2. The demand for a factor of production is more elastic in the long run than in the short run.

3. The elasticity of demand for a factor of production depends on its importance in the production process and the availability of substitutes.

Taken together, these laws suggest that the demand for labor, for example, is ultimately determined by the demand for the goods and services that labor helps produce. In the short run, the demand for labor may be relatively inelastic because it can be difficult for firms to quickly adjust their production processes to changes in demand. However, in the long run, firms may be able to find substitutes for labor or change their production methods, making the demand for labor more elastic. The importance of labor in the production process also affects its elasticity of demand: if there are few substitutes for a particular type of labor, its demand may be relatively inelastic.

ChatGPT also confidently discusses the Hicks challenge but refers to a “law” that was not even one of the four.

Mulligan: Didn't Hicks show that Marshall was wrong about one of the laws?

ChatGPT: Yes, economist John Hicks challenged one of Marshall's laws of derived demand, specifically the second law, which states that the demand for a factor of production is more elastic in the long run than in the short run. Hicks argued that this law was not always true and that the elasticity of demand for a factor of production could depend on the specific circumstances.

Hicks pointed out that in some cases, the demand for a factor of production could be more elastic in the short run than in the long run. For example, if a firm has already made significant investments in a particular technology or capital equipment, it may be difficult for the firm to switch to a different production method or substitute other factors of production. In such cases, the demand for the factor of production may be relatively inelastic in the long run, while being more elastic in the short run as firms can adjust their inputs more easily.

Hicks’ critique of Marshall's second law suggests that the relationship between the demand for a factor of production and the goods and services it helps produce is complex and can vary depending on the specific circumstances of the market. Nonetheless, Marshall's laws of derived demand remain an important contribution to economic theory and continue to be studied and debated by economists today.

Next, I asked for sources.  It got the books correct, which is pretty good for ChatGPT (famous for fabricating books and articles) but wrong chapters.  It should be Marshall Book V, Chapter VI.  Hicks’ second edition only has 11 chapters, although perhaps Chapter 12 can be understood as the material that follows Chapter 11 in which case “Chapter 12” is the correct part of the book.

Mulligan: Where did Marshall state the laws?  Where did Hicks challenge one of the laws?

ChatGPT: Alfred Marshall first introduced his laws of derived demand in his seminal work "Principles of Economics," first published in 1890. Marshall's laws are discussed in Book V, Chapter III, where he discusses the theory of distribution and the demand for factors of production.

John Hicks challenged Marshall's second law in his 1932 book "The Theory of Wages." In the book, Hicks argues that the elasticity of demand for factors of production can depend on the specific production technology and market conditions. Hicks specifically critiques Marshall's assumption that the demand for a factor of production is always more elastic in the long run than in the short run. Hicks' critique is discussed in Chapter 12 of his book.

I disputed the citation of Chapter III, so it apologized [not shown here] and cited Chapter VI of Book IV, which purportedly discusses “Distribution of Produce” (the actual title is “Industrial Training”).  More disputes produced more rounds of apology and fake references.  It tended back to Book V, Chapter III (a famous chapter) but with a different fake chapter title at each iteration.

Cliff Clavin was the famous tavern know-it-all in Cheers.  Perhaps Cliff is back, this time behind the curtain of AI spouting lots of jargon in grammatically correct but ignorant sentences. Is Norm somewhere back there too?

[image credit: https://television-b26f.kxcdn.com/wp-content/uploads/2020/08/Cheers-Cliff-Calvin-Screenshot-770x470.png]

Meanwhile, for more than a decade Artificial Intelligence has offered tools that are never self-contradictory and power a good exposition of Marshall’s Laws and much more in economics and statistics.

[Yes, ChatGPT can do the same for coding too: fabricated function options, fake references, etc.]

www.perplexity.ai correctly recited Marshall's four laws, including links to some microeconomics lecture notes. It correctly reported the sources of Marshall's law, and acknowledged that it could not report which chapter. It was incorrect as to which law Hicks challenged.

Lightning Strikes Coale Twice?

Mr. John P. Coale was one of the plaintiffs’ lawyers that initiated the first tobacco settlement agreements, which included a historic and ingenious scheme for individual states to levy the economic equivalent of national (sic) excise taxes. The scheme has been a topic in my excise-tax lectures for as long as I have been teaching them. Let’s not forget that Mr. Coale entered the fray when tobacco companies were thought to be invincible in the litigation arena.

I met Mr. Coale in Atlanta this year (2022), at an awkward meeting of Republicans – awkward because he is a trial lawyer, which is an occupation that perennially gets its regulatory favors from Democrats (President Trump’s deregulation team took pride in cutting out those favors, e.g., Fair Pay and Safe Workplaces EO, CFPB Arbitration rule, the Fiduciary rule, the Borrower defense rule, the NLRB "Murphy Oil" Rule, and NLRB workplace grievances).

Mr. Coale was and is suing big tech on behalf of Donald Trump, accusing them of violating the 1st Amendment of the U.S. Constitution as “state actors.” He cited (as I remember) the 1989 Supreme Court case Skinner v Railway Labor Executives’ Association, finding that “Although the Fourth Amendment does not apply to a search or seizure, even an arbitrary one, effected by a private party on his own initiative, the Amendment protects against such intrusions if the private party acted as an instrument or agent of the Government.” This conclusion is even more compelling for the first amendment, Coale says.

I wondered, with much skepticism, whether his big tech case might be anywhere near as spectacular as the big tobacco ones. Now it appears that big tech was even more integrated with the federal government than Mr. Coale initially accused. And Elon Musk did the discovery for him.

The Incidence of Intellectual Diversity

We now have lots of measures of diversity in the academy, by which I mean heterogeneity in race, gender, geography, political attitudes, etc.  At this weekend's Stanford Conference on Academic Freedom, much discussion focused on the chasm between the political composition of the academy and the general population.  A debate ensued as to whether/how this is related to academic freedom and whether/how public policy should advance affirmative action for "deplorables" (we deplorables use that term affectionately).

Such regulation is likely dangerous and imprudent, in part because the incidence of such diversity is poorly understood.  Small, and not necessarily frequent, voluntary actions can make a big difference.

I first noticed this as a college student circa 1990 when political correctness was surging.  Moreover, the large majority of my college classmates were quite unserious about academics, putting more time and effort into various extracurriculars and activism (South Africa was one of the big topics).  But adapting to the latter was pretty easy.  I fulfilled distribution requirements by taking courses like physics and computer science with the respective majors rather than the general ed versions that were watered down by popular demand.  I took many economics courses in the graduate schools and over at MIT.

While extremely serious about their studies, the graduate students were politically correct too.  More salient to me was a fair bit of group think around both policy and technical issues.  It seemed to me that they too uncritically accepted the Keynesian visions of much of the faculty.  Dynamic programming was nonexistent until Benabou (MIT) and Leahy (Harvard) came to town during my senior year, and still was quite a niche topic.  With some effort I found Stokey-Lucas-Prescott at Harvard Press, but I searched what seemed like every bookstore in the greater Boston area for Sargent's Dynamic Macro Theory (also a Harvard Press book) until finally acquiring a copy during a Christmas-break-blizzard trip to the Seminary Coop in Chicago.  

During a typical day on campus I would attend class, say, asking Professor Larry Summers something like "the trade deficit is a real variable -- why should nominal variables like currencies be our primary explanation of why they change over time?"  [He and Feldstein were teaching that the U.S. trade deficit had to decline, which required a significant depreciation of the US $ especially vs the yen].  Summers especially would often provide a mocking answer, typically provoking a hearty laugh among my classmates.

Here Robert Barro made a big difference without necessarily much effort [he invested in us students in many other ways too, but that is another topic].  The small number of students (of various ages) with interests closer to mine ended up working with Barro, and that's how we students met each other.  Barro had an extra desk on the second floor of NBER that I shared with Xavier Sala-i-Martin, Randy Kroszner, and (at various times) Michael Kremer, Serge Marquie, Jaume Ventura, and Holger Wolf.  After classes I would go to the NBER and recount my classroom exchanges with Xavier, Randy, etc.  With them as a friendly sounding board, I suffered no harm from Summers' nonanswers [see also the sequel in WSJ and WaPo].  Quite the opposite.  Their support helped me learn to stand on my own, and helped me find the few dynamic programmers in town (Barro would take several of us to Hoover one summer where I also met Sargent, McGratten, Judd, and others with overlapping interests).  I was learning that even the "smartest" people at the best universities had vulnerabilities in their arguments, which were betrayed by a refusal to engage.

The lesson here is that faculty can help a lot just by helping students find each other, especially on intellectual dimensions like those mentioned above.  As long as the intellectual minority is not so small as one, they can get a better education than the majority do.  Sheer numbers automatically exposed me to the group think, while just a few minority friends can be enough to facilitate engaging alternatives.  The raw distribution on campus need not be anywhere near the population distribution for at least the minority to benefit from intellectual diversity.

Several of the participants at this weekend's conference reported similar experiences.  Being alone is tough, but a few sympathetic colleagues go a long way.  Indeed, having the conference helped with that too.  The sorting aspect reminds me of Milton Friedman's description of the formation of the Mont Pelerin Society in 1947, which seemed quaint and anachronistic in 1998 but suddenly now needed as much as ever.

To be clear, my classmates did not gang up on me for being skeptical of the prevailing views.  Politically incorrect views did occasionally spawn cancellation campaigns, although not as frequently as today.  Certainly numbers play a role in mob rule, although even today the mob itself is already a minority, albeit outspoken.

Contents of the "Inflation Reduction Act"

Please let me know how this so-called "Inflation Reduction Act" reduces inflation.  Here's what's actually in it:

Major items

• Alternative minimum tax for corporations Sec 10101
• This raises the level of business taxation, which reduces real wages.
• IF it reduced the dispersion of business taxation, that would be a force toward increasing real wages to help offset the level effect.  BUT see below on the dozens of IRA provisions that increase the dispersion of business taxation.
• Gives the Treasury Secretary the authority to determine an individual corporation's tax liability!  Sec 10101 (a)(2)(C), (a)(13)
• [I changed my mind: I want to be Treasury Secretary!]
• Close the "carried interest loophole" Sec 10201
• $80B for IRS Sec 10301


• 3 types of drug price controls
• Prices set by HHS for selected Medicare drugs Sec 1191 [I think the Senate typist meant Sec 11091]
• Inflation rate cap for Part B drugs (obtained at hospitals and clinics rather than pharmacies) Sec 11101
• Inflation rate cap for Part D drugs (obtained at pharmacies) Sec 11102
• Medicare Part D (i.e., drug plans for seniors) insurance-benefit floors and reduced subsidy rates Secs 11201-11202, 11401
• Both benefit floors and subsidy-rate cuts will increase Medicare Part D premiums.  The net result could be more subsidy $ and more drug-plan expenses for most seniors.
• One insurance-benefit floor (Sec 11201) requires that enrollees have 100% of their pharmacy bill covered after they have spent $2k for the year.  Another (Sec 11202) does the same on a monthly basis (roughly $150 per month).
• A third insurance-benefit floor is for vaccines Sec 11401
• Zero is a dangerous number for a price!
• The 80% Medicare subsidy associated with these transactions is cut sharply.  This by itself would reduce distortions in the program.
• Remember that Part D premiums are already about 75% subsidized.  At that rate (which will increase -- see below), the government expense for Part D could well increase.  
• Increases in subsidies for Medicare Part D premiums Sec 11404
• Specifically, expanding eligibility for "low-income" premium subsidies
• Budget gimmick courtesy of Alex Azar: repeal rebate rule Sec 11301
• This rule would have prevented drug manufacturers from competing for Medicare Part D business by offering rebates, thereby sharply increasing Medicare Part D premiums and the government's Part D expenses.
• On paper, repealing this rule would reduce the federal deficit.  However, many expect that the rule would be struck down in court (regardless of whether the IRA repeals it), especially now that agencies have less latitude in reinterpreting statutes.  Hence this savings is a budget gimmick.
• I explain in Chapter 10 of yourehiredtrump.com how HHS Secretary Azar concocted this rule.  We warned him and Trump that Democrats would, via a budget gimmick like this, use the rule to "fund" their big-government programs.
• Extend the "temporary" Obamacare expansions that were put in place during the pandemic Sec 12001


• Clean energy tax credits Secs 13101-13802
• 291 pages of the Green Dream!
• Interestingly, Sec 13105 increases credit for nuclear power plants, but just those already built.  Intended to slow down nuke-plant closures?
• Otherwise "clean" refers to the various technologies that are in vogue, including bio fuels and battery manufacturing
• Get a tax credit for purchasing a used Electric Vehicle Sec 13402
• $4K or %30 of sale price
• But only for households with AGI less than $150K and EVs selling for less than $25K
• Must go through a car dealer
• Limit of one credit per vehicle lifetime
• Limit of one credit per taxpayer per 3 years
• As a result, the federal government will be granted EV credits when:
• EVs are produced,
• EVs are sold new, and
• EVs are sold used
• $20B for agricultural conservation programs Secs 21001 and 21002
• Appropriations for clean energy programs ($80-85B total)
• Another 100+ pages of the Green Dream, not to be confused with clean energy tax credits (291pp).
• $2B subsidies for "Electric loans for renewable energy" Sec 22001
• Biofuel subsidies Sec 22003
• $10B for rural electric cooperatives Secs 22004 and 22005
• $15B for Greenhouse Gas Reduction Fund Sec 60103
• $1B for HUD clean energy projects Sec 30002
• $3B for NOAA climate resilience projects Secs 40001-40007
• $10B to subsidize switching from natural gas appliances to electric Secs 50111-50123
• $1B to subsidize zero building energy code adoption Sec 50131
• $14B for DOE loans and grants Secs 50141-50145
• $3B for electricity transmission subsidies Secs 50151-50153
• $6B for the Office of Clean Energy Demonstrations Sec 50161
• $2B various other DOE Secs 50171-50173
• $1B for clean heavy-duty vehicles Sec 60101
• $3B for clean energy programs for ports Sec 60102
• $6B for various pollution-reduction programs Secs 60113-60116
• $3B for Environmental and Climate Justice Grants Sec 60201
• $5.5B for various other clean energy/environment Secs 60502-60506
• $3B for USPS clean fleet Sec 70002
• Taxing fossil fuels
• Increase royalty rate on offshore oil and gas by about 4 percentage points Sec 50261
• Increase royalty rate on onshore oil and gas by about 4 percentage points Sec 50262
• Both royalty rates are expanded to flared gas Sec 50263
• Methane Emissions Charge Sec 60113
• Permanent extension of tax on coal Sec 13901
• Roughly $1 per ton.  For context, coal prices were sometimes below $50/ton before the pandemic

Smaller items

• Eliminating cost sharing for vaccines in Medicaid and CHIP Sec 11405
• Changes to Medicare payments for biosimilars (Secs 11402 and 11403)
• Reinstate superfund Sec 13601
• Research credit for small businesses Sec 13902
• $5B for forestry subsidies Secs 23001-23005
• $0.5B to further carry out the 1950 Defense Production Act Sec 30001
• $1B for National Park Service and Bureau of Land Management Secs 50221-50223
• $0.6B various water Secs 50231-50241
• Regulation of offshore wind leasing Sec 50251
• Some kind of extension of offshore leasing program Sec 50264
• Limit encroachment of offshore windmills onto areas under lease for offshore drilling Sec 50265
• Various other DOE and DOI Secs 50271-50303
• Various other EPA programs (less than $1B) Secs 60104-60112
• Small amounts for Council on Environmental Quality Secs 60401-60402
• $4B for Endangered species programs Secs 60301-60302
• $2B for Neighborhood Access and Equity Grant Program Sec 60501
• Various other Sec 70001, 70003-80004