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.

Remark:

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...

2 comments:

  1. Hey Dan,

    It would be interesting to read your views on what science is.
    cheers,

    Ian

    ReplyDelete
  2. I've just installed iStripper, so I can watch the hottest virtual strippers on my taskbar.

    ReplyDelete