Sunday, July 31, 2011

why do economists disagree?

The New York Times Sunday Review had an article today about social values and science. The article began with a quote from Nobel Prize winning physicist Max Planck:
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.
The thesis of the article is simple and powerful: scientists who fully embrace their social values when doing research will come out doing better research for it. Instead of purporting to be more "scientific" than the opposition, researchers should explicitly note their social biases, because by doing so, we will approach a higher quality of science: when the social implications of economists' research are explicitly given ("thrown on the table"), so that they are held to be accountable for their ideas, economics will be the better for it.

It's time we started teaching undergraduates a broader view about why economists disagree. Mainstream texts often choose to present the market-centered view as a place of common ground for any group of economists and policymakers who disagree about how we ought to move forward. The "scientific" or rigorous justification for this choice is the welfare economics vision of the economy: i.e., that perfectly competitive markets maximize social welfare and are therefore socially optimal. Welfare economics has succeeded in an uncountable number of ways: from the clever mathematical articulation of its core ideas in the middle of the 20th century, to more unclear (though equally successful) treatments of the ideas in modern economics textbooks.

An alternative view argues that this baseline is an inappropriate way of addressing the concerns of workers, or the poor. For them, the terms of debate ought not to be defined by markets and market efficiency criteria: even if one admits that we are far from the social optimum, this "third view" believes that we should not discuss policy in terms of getting closer to that criterion of social welfare.

The punchline? Liberals and conservatives are both equally at fault for purporting their underlying economic model to be one of science, or even for trying to argue that views can be boiled down to a nice dichotomous world. A broader perspective on how economics is a pseudo-science would admit of more diverse views, and ultimately, better debates.

Economics -- indeed, the world -- would be much better for it.

Friday, July 29, 2011

employer control and theories of unemployment, illustrated

Image source: Terry Everton

Ever known someone, such as a parent or friend, who has lost their job, or who has remained unemployed for an extended period of time? Traditional theories of unemployment argue that your friend is unemployed because he or she is too lazy or lacks the skills to make him or herself marketable to employers. In the above picture, we see a different theory illustrated: namely, that employers use the threat of unemployment to increase the productivity of their workforce. As employers lay off workers, labor productivity increases. Similarly, as unemployment falls, workers feel more secure in their jobs causing them to slack off. The fluctuations in unemployment are thus at least partially a cause of employers' desire to control their workforce.

NOTE: This cartoon is part of an ongoing project at Imagining History to cull cartoons and other illustrations around the web as part of the Anti-Mankiw project (making critiques of mainstream economics accessible at the introductory level). See the link below for a list of all cartoons gathered thus far here:

Hat tip to Ian Seda at Los Expatriados for linking to picture, which was originally found at Monthly Review here.

Monday, July 25, 2011

property rights and /capitalist/ growth: some current research

Regular readers of this blog will know that I've devoted quite a bit of time to the idea of property rights and how theories of property rights align with historical experience, especially in the U.S. In her address to the Economic History Association annual meetings in 2010, Naomi Lamoreaux outlined a compelling thesis for the particular path of development that the theory and practice of property rights has followed in the U.S. since the early 19th century.

To motivate her claim, consider the following observations which form the essential conflict motivating her study. Perhaps the clearest, concise and most overtly-political interpretation of the libertarian notion of property rights can be found in the Washington Consensus, from the 1990s, which argued that we must instill institutions of private property and enforceable contract in developing countries, since these institutions form one important cornerstone of successful economic growth. Critics of this claim may point to the fact that many Western nations (if not all) did not develop in the same way. In fact in a lot of cases, property rights of the disadvantaged, or the minority, were infringed in the name of "economic development". The classic example concerns eminent domain cases, but there are a variety of other situations in which private property rights were not totally respected, but which nevertheless resulted in widespread growth for the areas/economies in question.

Rather than argue that these observations serve as "anomalies", as she likes to call them, in the economist's theory of property rights, Lamoreaux argues instead that such a negative history of property rights protection can still be consistent with an overall view that property rights are to be respected, according to the libertarian conception of the idea. She argues that what has allowed such continual infringement in property over time in the U.S. is a popular democratic tradition which commits itself to widespread property ownership. At the core of the American experience is the presence of a strong middle class, which allows such a seeming "contradiction" between what we Americans say to other countries, vs. what we actually do, to maintain itself over the centuries. Two strings of examples, illustrating the two themes, support her argument.

First, we have historically been weary of large concentrations of property ownership, so we have allowed legalized (i.e. through the legislature) redistribution in such cases. Second, we have a general mistrust and dislike for non-property owners (the poor ... also, they usually do not vote and at some times, could not vote), and so we will generally not get upset when there is a property taking which involves buying up a slum or some other poor area for economic development. Lamoreaux uses many different examples to illustrate both of these points, and overall, I must say that the article is convincing: America has a significant majority of property owners which has been very powerful in determining political outcomes. The political voice of the middle class has supported abrogation of property rights only when the middle class's own property remains untouched.

Many historians -- liberal and Marxist alike -- have identified this trend in American political economy as being one of the key reasons why America has supposedly strayed so far from true-blue, European-style socialism. The argument, presented commonly as the American Exceptionalism thesis, comes in the form of a celebration for the liberal and a lament for the Marxist, but the core underlying conception is the same: democratic ownership of property symbolized by a strong middle class prevents radical change from occurring because society becomes too "spoiled", "individualistic", or "market-loving". In terms of Lamoreaux's thesis, this means that property rights can be infringed upon in a non-democratic way only when it leads to the material benefit of property owners. (Basically, they don't get outraged/mustered unless their property is being taken.)

Lamoreaux refuses to accept (pg. 301) that she is updating the American Exceptionalism argument (which has a lot of holes in it already, thanks to a swelling labor history that documents worker radicalism -- as well as the state's violent reactions to it). Nevertheless, one has to wonder what else her thesis could possibly imply about liberal values in America. Her thesis seems to flirt with the old yarn (though I guess not so old, since some oldies are still talking about it, in various updated forms) that Americans have always been bourgeois-freedom-loving, individualistic modernists.

What would constitute a Marxist critique of Lamoreaux's thesis? (Or, really, any critique that wants to question the relevance of this argument.) First of all, some Marxists might perfectly agree with her claim. They would lament that such is the main characteristic of a value system which has proliferated in American society, an unfortunate staple of the "objective material conditions" in American society, and simply move on. Such lamentations were generally expressed by an older tradition of American Marxist historians, harking back to the the 1920s and 30s, and they don't hold as much weight now (why? well for one, it doesn't seem like a very strong argument). Others, however, might draw from the (updated radical) social theory of the 1970s and discuss the role of ideology in Lamoreaux's story. I think this is one promising way of moving forward.

Alternatively, Marxists might even question the true importance of property rights as a cornerstone of strong economic growth in a developing capitalist society, because the majority of gains in American wealth occurred in the North beginning in the 1830s and 1840s and came from industry, such as textiles. Surely there is a "property rights" element to this historiography as well, since the mills were obstructing waterflow and were protected against downstream users' claims through legislative acts and raw judicial negligence, but obviously that is not the main source of capitalist growth in these areas.

At any rate, Lamoreaux's discussion is important for putting a dent in the accepted notion of Western property rights theory. it's an interesting look at how a country can seemingly be so hypocritical. In the end, however, I sincerely doubt the relevance of her claim to overall capitalist growth, and I question what role ideology might have had in the process as well. By the way, a draft of the paper can be found here. Lamoreaux is an excellent scholar and I recommend any of her works! They are always very smart, deep, and creative institutional analyses.

Saturday, July 23, 2011

quick summer reading thoughts

I haven't been able to do much leisurely reading this summer, and what I have done is hardly voluntary. For example, I was given The Information by my family (albeit a bit indirectly!). Still, what I like about leisurely reading is that it usually stimulates some section of my brain that had gone un-"tickled" for some time.

The Information by James Gleick certainly fits in that category. It tickled the Hofstadter part of my brain that had remained dormant for quite a while. Years ago in college I read and quickly became obsessed with Douglas Hofstadter's Godel, Escher, Bach: An Eternal Golden Braid. I was a math major in college, and I have to say that those first two years of the major were really an exciting time for me because my eye was opened up to so many beautiful ideas, everything from the strange new field of Graph Theory to the centuries-old, strange and abstract field of Real Analysis. To see the ideas of mathematics applied to theories of consciousness in Gödel was truly captivating. (Of course, I later drifted away from math precisely for the lack of applications, but for a while there, math had me sold and, alas, I stuck with the major throughout college.)

But what I liked about Gödel, in particular, was Hofstadter's style of presentation and his ultimate thesis, i.e., that the human mind is something quite different from a computer. The book, in conjunction with the followup, titled I Am a Strange Loop, stressed the ways in which humanity's search for meaning through analogy, and the ways in which we struggle with self-reference when interpreting meaning. It was really fascinating to see Gödel's theorem applied here: Gödel said that formal systems (say, something which might represent a computer) will necessarily contain theorems which, while true, are unprovable using the formal system's tools. He essentially constructed a sentence that talked about itself, using the language of that very formal system. So that was dubbed "incompleteness" and Hofstadter uses the idea of incompleteness and of self-reference to say that it represents human consciousness, more or less. (Try answering the question, "why do you love your favorite piece of music?" you find yourself stuck at some point without being able to come up with a reason other than "I just love it!")

At any rate, the reason I went into that long explanation is to say that Gleick's book comes to the completely opposite conclusion. He starts from the bottom up, from our DNA, and argues that we're just carriers of information. Furthermore, he does it in a very strange way. He spends a lot of time talking about the history of information transferal, essentially tracing the development of modern communication theory, and then talks about genetics toward the end. Don't get me wrong, that part of the text is really well done and I learned a lot about the practical problems faced by a lot of the information theorists. But, the story is all about figuring out how to mechanically transmit information. Little is mentioned about meaning, because Gleick's thesis is that humans are simply agents carrying information, so that the information is the true protagonist of the story, so to speak. Information, measured in the omnipresent "bit", defined the beginning of time and information will remain when we are extinct.

He basically flips Hofstadter's ideas on their head by saying that meaning is not the important point; it's about the ever-growing industry of data storage and how efficiently it can flow. Think Facebook, Google. I'm not enthusiastic about such a position; it doesn't get my juices flowing like Hofstadter's book does. And I would say that Hofstadter provides a much better written and compelling case for his point of view. Gleick's story involves a lot of discussion of the brilliant inventor, and the development of communication technology is obviously related to military, development of the state, and private interests -- so how can there not be any discussion of meaning/symbols of information theory? Information technology is controlled, distorted, and manipulated constantly, so meaning inevitably "creeps in" wherever you talk about information even how it flows and is manufactured. And I'm sure Gleick would even agree with this statement. But the book is completely unconcerned with any of these ideas.

So whereas in Hofstadter I see a real concern with skepticism and philosophical concerns, Gleick's The Information is too dry. I wished there were more discussion of the humanity of it all, but I accept that perhaps that task is too much to tackle in a book which is already 400+ pages. Still, it didn't captivate me the way Hofstadter did and I think that derives from the somewhat flat conclusion and the (at times) slow pacing of the text.

An interesting exercise might be to think about how the incompleteness theorem could be applied to economics. It's already been applied to many different areas of science and philosophy, and I'm sure if someone wrote a pop-econ piece on it it would garner at least some widespread attention. The problem is that it's not exactly a mainstream idea: the thought that individuals are not soulless utility computers might cause most economist's heads to explode. The idea that there exists a human consciousness which, at its core, cannot be modeled formally, might risk a lot of Harvard tenured positions.


Thursday, July 21, 2011

an odd shift of perspective

Who would have thought. A random mentioning here of the DeLong-Harvey scuffle a couple years back led me to a discussion of that event by Econospeak, which led me, in turn, to a perspective on Keynes that I hadn't completely understood, but which is shared fervently by my colleague Josh Mason, and which I now appreciate much more.

My beef with Keynes, from day 1, has been with an overemphasis on the technocratic issues, ignoring the political issues that would, it seems to me, arise when the state tried to take over investment. The idea that we could solve the problem of capital scarcity by going this route is certainly powerful, and I would argue that with the appropriate institutional alterations it could be implemented. (For example, if you found some way of democratizing the workplace through a revolution then maybe it would work. Although even in this scenario, I suspect that if you do not abolish markets you will not be able to prevent market power.)

But it turns out that Keynes had a few other ideas up his sleeve, though they aren't discussed in the General Theory and they don't seem present or even implicit in Keynes' model of the economy. What is, then, the source of these ideas? To echo what JW's been screaming at me for ages, Keynes was inspired by philosopher G. E. Moore's discussions of what goes into the "good life". In fact, in a letter he wrote to T.S. Eliot in 1945 Keynes gets quite specific about it (now, why he was corresponding with old Tommy Stearns in the first place is a question that I would like answered, but I don't have easy access to the Collected Works at the moment to find out):
The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less.
Read the rest of the letter here, it's quite interesting. The policy is a kind of civil disobedience that has been proclaimed by radicals throughout history: in a situation of all-encompassing power, resist by not resisting. If you truly want to "abolish the rentier class", take away its fuel. As you slowly starve the beast, the concept of capital scarcity will slowly but surely evaporate and you have Keynes' utopian vision. In short, this is a fully developed, step-by-step prescription for bringing about massive change in society in a very radical way. Not in a Marxist way, mind you, but an important contribution to a utopia nonetheless.

Now, I've always known that Keynes didn't simply advocate for public control of investment. I knew that he favored strong unions, too. But I've always believed that Keynes was limited because his underlying model of market processes was very conservative. That is: keep the unions, keep the technocratic investment board, but don't forget to also include the bourgeois in power, too. Defend capitalism; just make it a more stable one where the rentiers don't play such a large role in government policy ("yeah right!" I used to exclaim to myself). But I think the policy ideas elucidated above demonstrate quite clearly that Keynes had a different understanding of humanity's goals in mind.

Well, now, it seems that I agree a bit more with my friend Josh on the issue...

Tuesday, July 19, 2011

||: a political project, not an intellectual one; a political project, not an intellectual one ... :||

Those are meant to be repeat signs, by the way.

A commentator writes on this post:
It would be interesting to read your views on what science is.
It's clear what is going on here, with this comment. Consider: Person decides to examine exhibit A. Exhibit A is mainstream economics, purporting to be a scientific theory well-grounded in evidence. Person looks at exhibit A and critiques it. Person can do so on many different grounds, obviously, but one of the most important methods is through the observation that something about exhibit A is logically inconsistent, according to the laws of science (i.e. according to what we actually see in the world, or according to the logic of the theory).

Unfortunately, by doing so, Person is implicitly using a set of his own standards (namely, those of "science") in order to judge the "scientific nature" of exhibit A. But science is not an objective concept in economics or in any field because political ideology also defines what "mainstream economics" is. The question thus arises: maybe Person himself has flawed standards of what "science" is! Perhaps even MORE importantly, perhaps Person's faith in scientific reasoning is representative of a person's faith in a politically charged "idea" of science itself! Fortunately, the main point of my criticism is not to judge exhibit A against what I purport to be "objective" standards of economic science. But I need to explain this a bit more.

Still -- touché. Good point. I should not be simply saying that "Mankiw's text does not hold up to the objectives of science", because that would be saying that if economics were more scientific, everything would be fine. But of course it wouldn't be that easy, because there is a component of ideology to the study of economics!

Fear not reader, I dare not go down the path of holding Mankiw up to standards of science which I myself do not believe in. And actually there are a couple reasons for that. First of all, it's cheap. Mankiw is a textbook! While there are of course some basic standards of logical rigor to which we all must tie ourselves, textbooks are not AER articles and therefore I am not going to pick on Mankiw for small slips in logic.

Second, and more importantly, is that I need to outline my full thesis as a process of steps so people don't jump on me for things I never meant to do in the first place. That is, the extent of my analysis is meant to go much further than simply making a point about logic or rigor. I plan to do the following:
  1. Examine the discussion of welfare economics
  2. Make some observations about how Mankiw tells his story, making note of both major and minor logical slips along the way.
  3. Wrap it up by thinking Seriously about the overall picture of general equilibrium that the student walks away from after reading this section
  4. Consider the political achievements attained at that point
In other words pointing out the non-rigorous nature of Mankiw's style is not the main point of my argument. However, I do think it's important to think about how welfare economics can be taught correctly, that is, in the sense that each proposition follows from prior assumptions and propositions. But that is not because I see any intrinsic value to the logical consistency of the welfare economics model. It's because of what the welfare economics model purports to be. That is, I would like to stress its political significance in the realm of economic thought.

Here's the clincher: That last point is very crucial to me because welfare economics is really a great political achievement. I don't think you would deny that, would you? The welfare theorems are really the epitome of the utopian vision of capitalism, a point expressed in numerous commentaries on them. Thus, by subverting the logic of the welfare theorems, as Mankiw does, he really is making a great political achievement.

He's essentially subverting the political overtones of them, which is essentially political indoctrination in disguise! For another example of the subversion of the political ideas, consider what happened in the 1940s and 50s with the mathematization of the welfare theorems -- that itself was a subversion of the political overtones because the mathematics is meant to bring the whole thing to a class of Higher Truth shared with mathematics and logic.

And this all goes back to my previous post regarding Lerner's verbal run-through of the general equilibrium model (for two people) in the 1930s. In that post I attempted to argue that the reasons why Lerner brought up the discussion of the way a perfectly competitive system would work with money was not necessarily in order to provide any substantive logical critique of Marxian economics; rather, the point was a political jab. All along.

Really an amazing story if you think about it, but you can trace these kinds of stories throughout the history of non-Marxian economic thought.

Sunday, July 17, 2011

"social" welfare: introductory dialogues

The concept of social welfare is hardly "social" at all. Once again the market takes center stage; and we are left wondering whether any social institutions could possibly exist in the bizarre world that Mankiw is painting for his readers. Yes, of course the model he sets up is meant to idealize in order to get to the core issues. But as we will see, Mankiw discusses the model in a way that leaves the student without any methodological framework for actually understanding those tools, except at a superficially wrong level.

We arrive at Chapter 7.

Mankiw motivates the study of welfare in perfectly competitive markets by asking whether the price of turkey at the supermarket is "fair". That is, he wants to know whether, by society's standard, the price of turkey is "just".

Behind this question is the following general idea: suppose we were to find some way of measuring the maximum amount of social welfare derived from an individual's consumption of a particular commodity. In equilibrium, the commodity will be sold at a stable price and with a stable quantity. Now, we know that when you consume more of a particular good, the additional satisfaction you get from consuming it diminishes. Thus, if you buy 5 apples at $1, that first apple was worth a lot to you, the second not so much, and so on. Mankiw wants to find some way of measuring exactly how much that first apple was worth to you, plus how much that second apple was worth to you, ... and so on. We know that the last apple, the 5th, is worth $1 to you because we assumed that to be the equilibrium price: you consume apples up to the point where the benefits of an additional apple equal the cost (or price) of an additional apple. So, what is the sum of all the positive values in between?

That is the concept of consumer surplus, or "CS" as we will call it for the remainder of the post.


Question: That seems easy enough to understand. But how does "society" fit in here? We were told by you in a previous post that society has no actual agency in the market, that it's really all about market mechanisms. But now you're telling us that Mankiw wants to judge whether the price of the good is "just" according to society. How does that leap take place?

Answer: The key lies in a concept that is not developed in Mankiw's presentation, thereby leading to the confusion. The key to clearing up your confusion is in coming up with a definition of "social welfare". That is, we need to define social welfare in an economy in order to say that markets maximize "social welfare"! The point is simple, and yet extremely crucial, at the same time.

Question: That seems like a simple problem to solve, though. We can measure the CS of any one individual by figuring out how much that individual values each apple. We just survey him or her (theoretically speaking) and come up with a number in money terms. Why don't we just do that for all consumers in the economy? Since everything is measured in money terms, we have a common unit of measurement. So we just add everything up! What's wrong with that?

Answer: There's nothing wrong with that, by any objective standard of right or wrong. But I do think that you need to realize what implicitly you are doing when you propose that measure of social welfare.

Recall first something that was mentioned at the beginning of this chapter of Mankiw: i.e. that we are now in the normative world of economics: what ought to be. Therefore, in your answer to me, you are implicitly saying that society ought to define social welfare as the equally weighted sum of all individually-summed CS's. That's a very big task you've taken on there!

First of all, you're arguing that your weighting scheme: " 1*(CS of consumer A) + 1*(CS of consumer B) + 1*(CS of consumer ...) + 1*(CS) + ... = SW" is not arrived at democratically or socially in any sane sense of the term. Rather, you're positing that that weighting mechanism is just how you think we should add things up to determine welfare.

Second of all, it's pretty arbitrary, don't you think? We've said that each person is unique in society. For example, some people are poor, and constrained much more by their budgets than other people. So, might there be a social welfare function that captures this fact more accurately? Think of person A and B: person A spends 90% of her income on food and other necessities (like turkey) while person B spends only 40%. How will a change in the price of turkey affect these two people? Most likely, it will affect them wildly differently.

Therefore, when you say "Competitive markets maximize social welfare" You are really saying "competitive markets maximize social welfare according to my definition of social welfare". That's not very "social".

Question: OK, let's step back here. Where does this leave Mankiw's original claim about society? All you're telling me is that society is arbitrary, or biased against people who are income-constrained. But "society" can't please everyone. Doesn't this at least give us a baseline?

Answer: No. In a text that purports to be scientific and based on measurement before theory, Mankiw 100% fails. There is nothing "scientific" about choosing an arbitrary weighting scheme and defining it as social welfare. There is also nothing "social" about it, since we are assigning this weighting scheme insulated from democratic processes which modern market economies are supposed to be all about.

We leave, for a separate post, the treatment of the social planner by Mankiw. To give the brief bottom line: it is a wild ride that involves a lot of intellectual thrashing about in the dark, making little sense and certainly not "enlightening" the student to anything regarding market processes or the significance of public policy in the real world.

Friday, July 15, 2011

turning the history of thought on its head, then reducing it to 3 pages not simply by summarizing but by ripping out the N-3 pages in between

Comments most welcome in what is to follow: the beginning of a multi-part series on the treatment of welfare economics in Mankiw's Principles of Economics. In his attempt to substantiate the claim that "society" is responsible for the distribution of income in an economy Mankiw fumbles the point, leaving us with a mess of confused statements and lines of thought. Anarchy ensues and the textbook abandons all hope to be perceived as an intellectual achievement (a political achievement, yes).

In a story that is still in the process of being uncovered, we have a startling discovery in the history of economics education in which the ideas and tools of welfare economics take early and center stage in the most popular principles of economics textbook currently around, by N. Gregory Mankiw.

Normally, welfare economics comes toward the end of any serious study of neoclassical economics. This is as it should, since many ideas and intuitions need to be developed before the student can even approach the idea of general equilibrium. The early placement of the subject of welfare economics (chapter 7 in his Principles text) is seen as an innovation by Mankiw: it allows students to see, early on, the applicability of the core ideas of mainstream economics to public policy.

But we think it's just a more convenient method of pushing the bourgeois ideology: the chapter is innaccurate according to any respectable take on the history of economic thought, full of conflicting and confusing statements, and yet confident throughout that it carries the stamp of approval of the "majority consensus" in economics. As such, Mankiw's act represents a significant turn in the history of economics education and of the bourgeois political project more generally: an exchange of scientific or "rigorous" dignity for, well, none at all.

Mankiw defends against the traditional ordering (i.e., the leaving of normative issues of consumer and producer surplus, social efficiency towards the end of the book, or by not including them at all) in classically bourgeois, non-rigorous fashion: early exposure to welfare economics 1. gives a better appreciation of supply and demand; 2. gives an "intuitive" grasp of market efficiency; 3. gives policy relevance (?) to the neoclassical model by using it as the baseline. As it is clear from these points, Mankiw does not place welfare economics early in the book because later concepts depend on it and build on it logically (cost of production does not build on welfare economics, methinks).

Mankiw sez that the former teacher of Ec 10 at Harvard, Martin Feldstein, originally came up with the idea of introducing welfare economics earlier because of his personal interests in public policy. Indeed, there is no reason, other than pure utility to the bourgeois economist, for putting welfare economics so early in the text. Up until chapter 7 (that is where welfare econ is first used), in fact, not much in the way of following the "scientific method" (which he purports to exploit throughout the text with the line 'observation, theory, observation') is invoked at all:

-The first chapters, as we have seen, are just Mankiw talking about how to think like an economist
-And then he spends a chapter talking just about a made up story, complete with dialog, where ranchers and farmers can trade and take a comparative advantage.
-After a drawn out chapter on supply and demand and the concept of elasticity, he brings government in by discussing how it can effect supply and demand through price floors.
-Then comes welfare.

It gets worse. The standard Marshallian method of calculating consumer and producer surplus (CS, PS heretofore) is flawed. While Hicks' reformulation saves the term in the end, it is not without significant qualifiers on Marshall's original formulation of the concept, so that any reference to the (albeit simpler) model of Marshall is incorrect. CS, for example, is not so easily the area under the market demand curve because that would a cardinal measure of utility (each person's utility in consuming a good can be compared with another person's utility in consuming the same good). If person A spends a large majority of his income on bread compared to person B, then an extra dollar might mean more to person A than it does to person B. Mankiw, of course, uses a rare Elvis Presley album as his example of consumer surplus (what various people are willing to pay for it) so he conveniently skirts the issue. But in fact, he never mentions the problem to begin with.


The way that some early economists tried to get around this argument is just fascinating. Lerner (writing before Hicks' innovation), speaking more generally about the welfare properties of general equilibrium, tries to argue that we must accept that "the satisfactions experienced by different people are similar in the sense that they are the same thing" because otherwise, we "deny meaning even to the assertion that anyone other than myself is capable of feeling any kind of pain or pleasure" (25). It is by far the most confusing paragraph in the chapter. He attempts to deride "philosophers" who question how we can know that each person experiences utility from the same good equally but he gives no hard facts. All he says is "that the satisfactions experienced by different people are the same kind of thing is incapable of proof". Observation, Theory, Observation, indeed.

Others, including Marshall himself, simply assumed that each person spends similar (small) amounts on each commodity.

End Remark.

How ought welfare economics be taught, then? (We touch on the point briefly here, but it will certainly gain more attention in upcoming posts.) From the ground up. There's a lot of consumer choice and production theory to get through before we can even think about normative properties of our model. As observed earlier, the entire edifice of the welfare model is cracked and beaten and is probably built on a few fault lines too. We should just get rid of the fairy tale stories implicit in this old horse. But for now, it is important to get to the basics: see how the culture of bourgeois economics works in modern education: turning the history of economic thought on its head, stripping it down to a few pages, and ripping out everything else in between.

Some of the ideas of this post were taken from scholarly articles, including one by Miroslav Svoboda found here. The history of CS and PS is well-known but Svoboda has some interesting anecdotes in their account of the story. They will be elaborated upon in subsequent articles.

This post draws on Mankiw's remarks on "Teaching the Principles of Economics," which appeared in the Eastern Economic Journal, Vol. 24 No. 4, Fall 1998.

Closing the first of this multipart series with the observation that teaching the "right" form of welfare economics is both the right and terribly wrong answer to our troubles. "Right" because the lack of a coherent logic to the idea as presented in the text means that many students, who are not taught the importance of assumptions or even their accuracy, will accept the story. "Terribly wrong" because, even as taught correctly, it is still a horribly misguided understanding of how an economy works.

The contradictions, inaccuracies in this great story are still to be revealed...

new look

For those of you who don't stop by Imagining History daily and read through an RSS feed or Google Reader instead, I thought I would point out that the site has been revamped a bit, with A Cool New Background (yeeeah!), organization, and some additional blog pages on the right side with info about teaching and research. Any comments on these, how they can be cleaned up improved? Tough luck.

(Just kidding. Leave a comment and I'll see what I can fix.)

This was done partly because I was getting bored with the staid orange/white/black combo and also partly because I apparently just hit my 200th post the other day in a little over 2 years of blogging... wooooow!

But don't worry, it's a new look but same feel: you'll still get all the usual writings about videogames, random econ history papers that are actually Cool to Read, and assorted links... although I might be a bit more heavy on Anti-Mankiw for at least a little while...

Wednesday, July 13, 2011

addendum: stories?

Of course, the idea that NC econ is built on stories is not a new one; McCloskey made the point nicely in The Rhetoric of Economics over 20 years ago and Steve Cohn, professor at Knox and UMass Econ PhD, has argued in "Telling other Stories" that that's precisely what heterodox economists need to do: tell stories which are anti-Mankiw.

Look, you either stress the rhetoric or the "rigor", and you are either orthodox or heterodox.

-Orthodox rigor people are the "positive economics" people out there, people who just want orthodox economics on some "scientific" footing, whether that be more math, or better statistical analysis, or what have you.

-Heterodox rigor people are similar. They want to fight NC economists by "beating them at their own game" -- becoming better mathematicians or statisticians or historians than the orthodox economists, and answer heterodox/left-leaning questions in the process to jet them out.

-Orthodox rhetoric people are the welfare economists, the economists who quite consciously seek to propagate mainstream theory. Mankiw, for example. At the very very top of the ladder, these people often blur with the orthodox rigor people because they are just so good at everything. (Duflo, Acemoglu come to mind).

-Heterodox rhetoric people are the political activists, Marxists, anarchists out there who realize that there is a political battle to be won here and it won't just be won in the ivory tower. We need to raise awareness of fundamental wrongs in the economy and push for the smashing of capitalism and its institutions. At the very very top of the ladder, again, these people often blur with heterodox rigor people (Bowles... and not an economist but I would of course put some public intellectuals like Harvey or Chomsky or those guys at Wisconsin Soc/PolSci(?) in this group).

So in short, Cohn's view (mine as well) is that we need to come up with some good rhetorical strategies taking the form of anecdotes or stories which frame things from a workers' point of view. (McCloskey, on the other hand, believes we need to move in the 'scientific' direction in order to save NC econ.)

Cohn's list of stories is quite exhaustive, including Robinson Crusoe (apparently he owned a slave who was the other person on the island in the NC version of the story), Diamond/Water paradox, and "supermarket" analogies of an economic process rather than "workplace" analogies (even so-called "liberals" such as Brad DeLong are guilty of this fault, for example when he tries to analyze Polanyi's concept of a disembedded market *facepalm*). Needless to say, there is a lot of room for good ideas here.

We move next to a striking example of NC econ stories in action, one that has profoundly earth-shattering effects on Mankiw's text.

This article drew from Steve S. Cohn's "Telling other Stories: Heterodox Critiques of Neoclassical Micro Principles Texts", GDEI Working Paper 00-06, August 2000. Link here.

Tuesday, July 12, 2011

the culture of the bourgeois

Any culture produces stories, myths, and other traditions with the intent of reproducing itself in society. Economics is no different. Economics attempts to reproduce values that serve the interests of certain wealthy individuals in the capitalist economy (capitalists). This is not a new idea: capitalists itself would admit to it. But, like the creation myths of religions, we can question the truth of these stories with cultures and stories which are not so easily heard, precisely because they are against the status quo, with powerful results.

We shouldn't be surprised by all of the stories we find when we open up an introduction to economics textbook. All cultures have their own sets of stories which are meant to reproduce within any one culture the main ideas, customs, values of the society that maintains that culture. For religion, we have the creation stories and other parables. Ancient Greece had oral history and myth.

Therefore, it is very important to realize that when we see the proliferation of stories in economics -- whether it's "Vinny the vegetarian and Mark the meateater" who trade goods so as to equate their marginal utilities with the prices of the goods, or "Sam the farmer and Ralph the rancher" who specialize in their work in order to exploit comparative advantage -- it is very important to realize that there is a culture behind all these stories, attempting to reproduce itself throughout society. Just as religions spread themselves through introducing their texts and practices to new potential members, and just as any culture has its own set of traditions which, once known and practiced by an individual, signifies the individuals membership into a group, understanding in and believing in the central stories told in economics will lead you on the path towards being an economist (or at least, being accepted within their culture).

The problem is, of course, that the stories of economics are incongruent with reality, even when its practioners never cease to argue in favor for them.

Remark: Whenever I read these "stories" I am really amazed at how unbelievably untrue they are -- even while its author is arguing for them until he is blue in the face. For example, in Abba Lerner's The Economics of Control, he explains the classical model of general equilibrium (i.e. the allocation of goods and services in a competitive economy in the case where N=2). He explains, on page 20, that "[the optimal allocation of goods in a competitive economy] seems so obviously what happens in the existing free market economy that all the rigamarole about marginal substitutability and barter exchange would appear quite unnecessary. There are two reasons," he goes on to say, "why all this argument is not unnecessary."

That is, he gives two justifications for why we need the competitive model.

They are far from satisfactory based on any standard of logic or rigor.

The latter argument he provides is that such a model is necessary because it is the foundation upon which later results are built. Fair enough -- surely insane conclusions may derive from any number of laughable premises.

The former argument is more intriguing. "The first reason," Lerner begins, "is the horror that many socialists have of anything that reminds them of the existing capitalist world. This makes it necessary to show that the usefulness of money as a means of bringing about a good distribution of goods is not merely a bourgeois belief carried over uncritically from experience under capitalism but can be shown to bring about desirable ends by a consideration of fundamental principles" (21). But the Marxian critique of money as a basis for exchange is based on the fetishization of commodities and the principle differences between exchange value and use value of those commodities (particularly, labor). But nowhere in Lerner's discussion of a market economy does he address the Marxist critique of capitalist exchange.

My point is that, according to Lerner's discussion, the theory of the optimal allocation of goods in a market economy is not a substantive critique of socialist policy; rather, it is viewed by Lerner as an ideological attack on (or defense against) Marxism.

That changes the game considerably -- and it highlights the important point made above that these are stories which are told over and over in order to reproduce the ideology of traditional, bourgeois economics.

End Remark

For over a hundred years, since at least the time of the response to Marx's Labor Theory of Value, proponents of mainstream economics have actively recognized that their project is a political one. Thus, the bourgeois culture behind economics tells stories which aim to reproduce the system's core beliefs, even though those beliefs are far from universally true. And, in a surprising twist, most economists will not even admit that they are not being rigorous even though it is obviously true that they are not being rigorous.

Sunday, July 10, 2011

why there is more to the organization of economic activity than incentives, tradeoffs, and prices: dilbert edition

Dilbert knows that applying economic incentives in the workplace is not always best, thus calling into question the idea that "markets are usually a good way of organizing activity". Most often -- as is the case with work -- there are probably other, more effective methods for getting Dilbert and his coworkers to perform well.

anti-mankiw: dialogues

The idea that "society" allocates goods and services in a market economy is incorrect: the true agent responsible for economic outcomes in such an economy is the market and market mechanisms. But market mechanisms are far from universal, far from the "usual way of organizing economic activity." In the home, with friends, or at work, decisions are made based on responsibility, need, trust, and love (in the case of the home and friends), or authority (in the case of work).

Question: Economists often attribute the resulting allocation and distribution of goods and services in an economy to SOCIETY, e.g., "SOCIETY allocates resources across the individuals in an economy." But what precisely do economists mean by the term "society decides..."?

Answer: Economists use the term "society decides..." or "society allocates..." in order to rid markets of any blame for problems with the current distribution of income in a society. When economists attribute the current distribution of income to society, economists really have in their minds a process which is not social, but which does rely heavily on markets and market mechanisms:

1. Individuals interact with each other according to a set of assumptions placed on how they behave (they are rational, they respond to tradeoffs, opportunity costs, and incentives).

2. They interact in a marketplace by trading at various prices until ...

3. everyone is satisfied given their budget constraints.

4. The point of this process is to reach the "social optimum": the amount of goods each person has received after individuals have traded in the market.

In short, it is not really "society" that allocates goods and services; it is individuals who interact through a market mechanism. By placing the "blame" on society, or calling it a "socially" determined income, economists make it seem like the market process is impersonal. According to them, the market does not discriminate against the sick and poor, when the sick and poor need medical services or food and cannot pay for them.

Question: But no one is discriminating against the sick and poor when they need medical services. It's just that, when you place everyone who needs, say, medical services, into a room with everyone who wants to sell medical services, the price naturally gravitates to a point where some are just too poor to afford them at the equilibrium price. So, who is there to blame, if not poor people, for letting themselves fall into bad health or not working hard enough to afford medical services at the current price?

Answer: The answer lies in who is truly to blame for the fact that the most needy cannot find the services necessary to survive. Economists say that "society decides the optimal division of goods and services in an economy." That is, society, which is composed of individuals freely making decisions, gives rise to the unfortunate situation of some people being rationed out of healthcare, or food or what have you.

But what we have found in the previous answer is that it's really about the market mechanism -- that is the agent responsible for some of the social problems you mentioned.

Question: So what you are saying is, we ought to blame the market for social problems? But Principle 6 of Mankiw's Principles textbook says that "markets are usually a good way to organize economic activity." Ought we try to enforce efficiency-enhancing solutions to our problems wherever possible, including organs, health care, and housing?

Answer: But markets are not a "usual" encounter in our society. When you go to work, markets are not how that economic activity is organized. Activity at work is organized by a boss or superintendent, who tells you what to do, and then you do it. Sure, you have the right to quit and look elsewhere for a job if you do not like your boss or think you're qualified for a better position, but that does not diminish the fact that for 8 to 9 hours a day you are working not according to a market mechanism, but rather according to the decisions of a central controller and his or her staff.

And when you go home, your mother or father will make dinner for you, not according to market prices or rationality, but because they love and care for you. They also recognize that you have certain needs in life, and try to provide a good life for you based on those needs.

In short, the majority of your day-to-day life, is decidedly not market-based.
-8 to 9 hours are spent at work or at school, under a boss or listening to a teacher
-7 to 8 hours are spent sleeping at home, under a roof provided for you by your parents
-1 to 2 hours are spent enjoying meals prepared for and provided to you by your family
-That leaves 4 or 5 hours left, which you might spend at a school, with your friends, or some other environment which is certainly not guided purely by market incentives
Furthermore, these traditions -- receiving orders in the workplace, or having your parents provide for you as a child -- have worked for thousands of years. So, is it so obvious that we should use the market to allocate healthcare, if there might be some other ways of doing it based on much more trusted and common ideas of responsibility, or need?

In conclusion, when economists say that society has allocated goods and services, it is really a market mechanism at work. Thus, the market is responsible for many existing social problems of the poor and sick. Since a large part of our time is spent outside of the market, either at home or at work, perhaps there are other ways of allocating the things we need. We should look into these before accepting as fundamental the ideas that "trade can make everyone better off", as Mankiw argues in Principle 5 of his textbook.