I have just listened to the recent Econtalk podcast with Arnold Kling on his new “paradigm”, Patterns of Sustainable Specialisation and Trade (PSST). On first thoughts, I am not convinced about the idea. If anything, the paradigm appears to need a lot more development - although reading Kling’s blog posts, he may agree. I felt that many of the stories involved too much hand-waving and not enough empirical backbone to be convincing.
I won’t go into the details of Kling’s paradigm - I suggest listening to the podcast or tracking through Kling’s posts at Econlog for background. His most recent one on PSST is here. But, I had a couple of initial thoughts.
First, this paradigm has many similarities to evolutionary economics. Nelson and Winter’s An Evolutionary Theory of Economic Change contains a lot of material on search, competition and organisation is along the same lines as that discussed by Kling. Naturally flowing from this, would agent based modelling or other evolutionary economic modelling techniques be useful in developing working models of Kling’s theory?
Second, and given that I am far from convinced as to whether this paradigm is correct (for example, can PSST explain the current high levels of unemployment), I was wondering what empirical evidence would sway me towards it. If we track workers who have become unemployed during this recession, the PSST paradigm would predict that a sizeable chunk of this group will go to new jobs created by entrepreneurs looking to take advantage of this cheap resource. Will this be the case? How many construction or manufacturing workers will end up in jobs in which they have a new comparative advantage, and how many will get employment doing almost the same thing they were doing before? We could apply a similar test to the employer side. Do firms hire back workers for positions that they previously dumped workers from, or is the hiring in new positions in new firms?
Update: A quick additional thought - what does this paradigm say about immigration? If the gates are opened and immigration levels jump, how long is the period of adjustment for entrepreneurs to be able to take advantage of this huge resource of presumably low-skilled labour?