Saturday, January 23, 2016

Two Views On Introductory Economics

Recently, two bloggers have commented on what is taught in college classes for introduction to economics1. Noah Smith accepts simple partial equilibrium models of perfect competition as internally valid2. He argues, however, that "Economics 101" models should be complemented, especially in policy applications, with complications introduced in more advanced models. Robert Paul Wolff, on the other hand, uses introductory economics as an example of ideological bullshit, to use Frankfort's technical term.

As far as I am concerned, simplistic supply-and-demand reasoning has been shown to be an incoherent mishmash decades ago. Like Prof. Wolff, I like to justify this view by referring to accepted findings of research literature. I particularly like to emphasize the supposed market for labor. Why do economists not revise their teaching3 so it is not susceptible to being criticized as ideology? I offer three suggestions to complement Wolff's treatment.

First, perhaps economists who teach outdated nonsense are just doing their job. Introductory courses are followed by later courses. And teachers of later courses expect students who have satisfied the prerequisites to have been exposed to graphs of supply and demand functions, the theory of utility maximization, marginal cost, marginal revenue, the First Order Conditions for maximization, consumer and producer surplus, etc. You might hope for teachers who introduce a bit of pluralism. But even economists who agree with me might find it challenging for the students to be both exposed to critiques and alternatives, and yet gain a command over the conventional material.

Second, perhaps the situation might be thought of as a type of coordination game, as in modeling a totalitarian society. Maybe the majority of economists privately think that they are being asked to teach balderdash. But, with the profession being the way it is, they see little benefit in saying so. Each sees others as publicly accepting what is being taught. So they put their doubts aside. If all were to be forthright at once, the situation would be different. But how could teaching transverse from the current equilibrium to that new one?

Third, maybe many economists come to accept what they are teaching as a way of managing cognitive dissonance. It must be an uncomfortable feeling to know one is spouting nonsense and, if one wants to advance in the profession, to be impotent to change it. Better come to accept the nonsense4.

  1. Both bloggers seem to be concentrating on microeconomics.
  2. Is Noah's conflation of elasticity with the slope of a function an acceptable simplification for a mass audience? Or just muddle?
  3. I do not teach.
  4. I guess this is related to the just world fallacy.

Monday, January 18, 2016

Krugman On Robert Reich's New Book

1.0 Introduction

Robert B. Reich has a new book,Saving Capitalism: For the Many, Not the Few out last year. Paul Krugman reviewed it, on 17 December 2015, in The New York Review of Books. In this post, I record a negative reaction I have to this review. I do not think I am formulating a strong argument, rather merely making a claim that needs more justification.

2.0 Review of Reich's Book

Reich notes that many people portray the major political economic choice in the United States of America as between free markets and government intervention. Reich rightfully rejects this false dichotomy and argues that government creates the markets. Consider such matters as the definition of property rights; what practices are permitted in the market by, say, antitrust law; what contracts will be enforced in courts of law; what legal options, such as bankruptcy, agents can resort to when unforeseen circumstances arise; and the distribution of the allotment of resources to enforcement of various laws. Decisions along these lines create markets, and government can choose various sides. These choices are not necessarily interventions, but constitutive of the definition of markets.

Many examples can be cited. Think of intellectual property, such as copyrights and patents. Consider how markets arise, from cap and trade polices, for pollution permits. Or think of the labor market. Some states will not permit corporations and unions to agree to contracts in which every worker at some specified rank must be a union member; rather, corporations are permitted to hire workers that get the benefit of union wages without making contributions. One could simplify voting for unions by instituting card check. And, if workers choose to join a union, why shouldn't that union be able to freely choose the portion of their budget to spend on political lobbying?

Various myths follow from an acceptance of the false dichotomy. For example, the theory of marginal productivity has been read by many since its creation to say workers are paid in the market what they are worth. Reich also looks at the reality of how corporate executives have increased their pay.

Market processes and their outcomes refract social and legal norms, not natural laws. These norms and their outcomes differ a lot between the post-(World) war (II) golden age and the neoliberal world established after the end of Bretton Woods. Capitalism is a dynamic system, and the current rules are always changing. I do not see why, with lots of struggle, vicious circles currently enriching the few cannot be overthrown and shared prosperity be re-established to some extent.

I have some suggestions for how Reich could strengthen his arguments. I think Reich slips into polemics sometimes when I would prefer more analysis1. I wish Reich would reference more scholars and traditions developing similar points2. I think John Kenneth Galbraith shows an awareness of traditions I like, and Reich does have Galbraith's notion of countervailing power as a major theme in his book. Maybe explorations of these traditions would lead Reich to more radical conclusions3. I think Reich still has a hankering for the theory of perfect competition. Even if markets were perfect and corporate boards did not consist of overlapping sets of cronies, neither wages nor executive pay would be determined by marginal productivity.

4.0 Krugman's Review

Paul Krugman's review is generally positive4. This contrasts with how Krugman used to write about Reich back in the 1980s and 1990s. For Krugman then, Reich was a policy entrepreneur who did not measure up to the supposedly rigorous standards of mainstream economists.

A major theme of Reich's book is power. Krugman, by casting this theme in terms of market power, asserts (mainstream) economists have long addressed this issue. I agree that mainstream economists have models addressing this idea:

"Market power has a precise definition: it’s what happens whenever individual economic actors are able to affect the prices they receive or pay, as opposed to facing prices determined anonymously by the invisible hand." -- Paul Krugman

Given this orientation, Krugman can argue against Stigler's claim that Chicago school models of perfectly competitive markets are empirically adequate. Krugman also takes the opportunity of Reich's book to argue that the theory of Skill-Biased Technical Change (SBTC) is mistaken. I think Krugman is reading Reich's book in a more mainstream economist's world of discourse5 than, in fact, is and should be the case.

  1. Maybe this is a matter of contrasting tastes. I'm less likely to draw policy conclusions. Reich certainly knows more about Washington than I do.
  2. For example, institutional economics; Karl Polanyi's The Great Transformation; Hacker and Pierson's Winner Take All Politics; theories of adminstrative, full-cost, or markup pricing.
  3. What substantive disagreement is involved in saying your goal is saving capitalism, as opposed to instituting social democracy?
  4. The back cover of Reich's book features blurbs from Laura D'Andrea Tyson, Joseph Stiglitz, and Lawrence Summers, economists all.
  5. Reich does, in fact, address the (incoherent and incorrect) theory of SBTC.

Saturday, January 09, 2016

Marxist-Feminist-Anti-racist-Ecological Economics

I have recently read Julie Nelson's 1995 essay in the Journal of Economic Perspectives. She thinks - and this is a well-established idea among academics - that gender and sex are not the same. One is socially constructed, and the other relates more to a physical substratum. This concept goes back as far as Simone de Beauvoir's The Second Sex. She argues that woman is defined as the negative of man:

"Humanity is male, and man defines woman, not in herself, but in relation to himself; she is not considered an autonomous being... she is nothing other than what man decides; she is thus called 'the sex,' meaning that the male sees her essentially as a sexed being; for him she is sex, so she is it in the absolute. She is determined and differentiated in relation to man, while he is not in relation to her; she is the inessential in front of the essential. He is the Subject; he is the Absolute. She is the Other." -- Simone de Beauvoir
Table 1: Gender-Coded Dualisms

In this way of analyzing social customs, one might see homo economicus as gendered male. One might wonder if the traditional neoclassical analysis of the optimizing, but constrained, agent is only a partial viewpoint. Do the objective functions in typical neoclassical models miss goals that are often coded as feminine, for example, altruism? (Might your answer have varied since the publication of Nelson's essay?)

Thinking about how certain dualisms are gender-coded might lead one to thinking about other groups that are taken by hegemonic groups as Other. Socially constructed race is an obvious category in the United States in my lifetime. Looking about, I might think that intellect versus physicality is an analogous dualism for race, with intellect being assigned to whites and physicality assigned to blacks. But reading Eldridge Cleaver's Soul on Ice long ago taught me that such assignments vary with time and space. Cleaver thought that both superior intellect and superior physical fitness were assigned to whites. I suppose you can see such tropes in old books, say, Edgar Rice Burroughs' Tarzan series.

Feminist economics also points to the need for economists to analyze the household. This idea of looking outside a narrow definition of economic activity for a full understanding of markets reminds me of another argument, namely Schumacher's in Small is Beautiful. Economists need to also look outside markets to natural ecologies to fully understand markets.

Suppose one is interested in how an advanced capitalist economy, such as in the United States, can sustain itself. How is reproduction, either on the same or an expanded scale, possible? This question was explored by Marx. Furthermore, to fully address this question, one must look beyond the economy of the advanced country, narrowly defined. For an economy to be reproduced, preconditions must be met in:

  • The households, in which workers are reproduced and cared for. Households are outside markets, but provide a necessary foundation on which markets rest.
  • Other economies, particularly in the third world, where many resources are extracted and production for the market is off-shored these days. That is, the activities in other countries, outside the United States, provide a foundation on which American capitalism rests.
  • Nature, which also lies outside markets and provides a necessary foundation on which markets rest.

Thus, there is a need for a Marxist-Feminist-Anti-racist-Ecological economics.

  • Simone de Beauvoir (1949, 2009). The Second Sex, Trans. by Constance Borde and Sheila Malovany-Chevallier.
  • Eldridge Cleaver (). Soul on Ice.
  • Robin Hahnel (2016). Environmental Sustainability in a Sraffa Framework, Proceedings of the American Economic Association.
  • Julie A. Nelson (1995). Feminism and Economics, Journal of Economic Perspectives, V. 9, No. 2 (Spring): pp. 131-148
  • E. F. Schumacher (1973). Small is Beautiful: Economics as if People Mattered.