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.

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