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July 31, 2007

I Trusted You!

Foreign Policy magazine ticks off "5 lies my economist told me."

July 31, 2007 | Permalink

Comments

Interesting, but I was surprised that the first section, "High productivity and low unemployment make us all better off," mentioned this:

Heretical facts: Despite six years of sustained growth, with unemployment averaging around 5 percent, the median U.S. worker is not faring well. Since 2001, middle-class Americans have seen their pay drop by 4 percent, although labor productivity went up by 15 percent during the same period.

But then didn't mention Factor-Price Equalization, which is:

"The fourth major theorem that arises out of the Heckscher-Ohlin model is called the factor-price equalization theorem. Simply stated the theorem says that when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries."

http://internationalecon.com/Trade/Tch60/T60-14.php

Posted by: David | Jul 31, 2007 3:29:03 PM

Also, in "Capital must always be let free to flow," they ought to mention the uncomfortable fact the free capital flows, contrary to theory, often mean capital fleeing developing countries to developed countries.

Here is Brad Delong talking about the problem: http://econ161.berkeley.edu/movable_type/2003_archives/003037.html

Posted by: d | Jul 31, 2007 3:34:14 PM

Actually Ezra, I think this is pretty superficial. In this one, for example, "Japan—no wait, China—is going to take over the world economy," it doesn't really discuss catch-up growth or dimishing returns--all of which is in a 101 economics textbook, or deftly discussed by Paul Krugman here:

http://www.foreignaffairs.org/19941101faessay5151/paul-krugman/the-myth-of-asia-s-miracle.html

Posted by: David | Jul 31, 2007 3:41:37 PM

Maybe the iron rule by (mostly conservative) economists over our legislative, regulatory, and taxing policies - principally associated with Friedmanomics - is being to be challenged. Certainly the walls of the fortress are under attack, and the hot oil to pour on the attackers is running low.

Like war, which is too important to leave to the Generals, national and international policy is too important to leave to the economists. Viva la revolucion!

Posted by: JimPortlandOR | Jul 31, 2007 4:13:44 PM

One of those lies is in fact true. Unfortunately, my economist said the opposite.

The Euro is actually pretty bad. Too bad the collected doltish economists of Europe are its most vocal constituency.

Posted by: Marshall | Jul 31, 2007 5:22:47 PM

Also, I love it that the only explanation for wage stagnation is, in essence, "the damn furriners."

Yep, no way it's the weakening of unions and the comparatively increased power of a managerial and especially investment class that believes as an article of faith that higher wages are antithetical to profits.

That should be a part of the explanation, at least.

Posted by: anonymous | Jul 31, 2007 6:01:49 PM

Anon:

I agree. That is exactly what I was getting at with the Factor-Price Equalization point.

Posted by: David | Jul 31, 2007 6:25:53 PM

What a stupid list: it attacks one strawman version of economists views with another strawman version, without ever correctly stating what economists actually think.

On the first item, "High productivity and low unemployment make us all better off," there actually is a fairly strong consensus among economists:
1. It's not wages that should track productivity, its compensation (wages plus benefits like health insurance).
2. Compensation growth does track productivity growth fairly closely.
3. To the extent that compensation growth has lagged productivity growth, it's because inflation is mismeasured (causing real compensation growth and productivity growth to be mismeasured). Declining unionization has also played some role.
4. Increasing trade and immigration have had a very minor impact on wages or compensation.

So the FP article basically fails to mention *any* of the points in economists' consensus view. On the only relevant points that are mentioned (trade and wages) the article gets economists' views exactly backwards.

The economists' consensus view is described well in this Congressional Research Service report.

Posted by: Ragout | Jul 31, 2007 7:15:50 PM

I don't think it's average productivity that neoclassical economics predicts compensation tracks. It's marginal productivity. dY/dL, not Y/L.

Posted by: Julian Elson | Aug 1, 2007 12:22:55 AM

Posted by: David | Jul 31, 2007 3:41:37 PM

it doesn't really discuss catch-up growth or dimishing returns ...

What in the world would diminishing returns have to do with it? The kind of growth regime that Japan established from the 1950's to the 1990's, or that China established from the 1980's through the present, do not exist within a short run decision horizon, in which there is a fixed factor of production.

Indeed, the textbook says so ... with given technology, LR costs curves can exhibit diminishing, constant, or increasing returns within production ranges relevant to a given industry.

And even where there is LR diminishing returns, returns can still rise steadily over the long term if learning curve effects over the medium term and technological progress over the long term dominate the instantaneous projection of current conditions that is represented by a microeconomic "run".

If the Chinese economy stumbles, there will certainly be postdictions available from traditional marginalist economics to explain the event, but in reality the stumble will involve a fault in the interplay between pure technical change and the evolution of economic institutions that make up technological progress ... and that is a problem that lies outside the scope of traditional marginalist economics.

Posted by: BruceMcF | Aug 1, 2007 8:50:11 AM

It is notable that the very first lie is an issue where the well-trained macroeconomist of the 1950's would have given the correct answer ... productivity growth provides the opportunity for growth in real wages, and conditions of effective demand in product markets and relative bargaining power in labor markets will determine whether that opportunity is translated into real wage growth.

But that more complete explanation has been expunged from the mainstream in favor of a less complete explanations that are more compatible with greater reliance on the traditional marginalist economic toolkit.

Posted by: BruceMcF | Aug 1, 2007 8:54:25 AM

BruceMcF:

RE: diminishing returns. I was being sloppy and didn’t mean to write that. My point was about catch up growth.

Posted by: david | Aug 1, 2007 9:10:56 AM

"High productivity and low unemployment make us all better off"?: If many economists were smart they might have been lawyers. :-)

Apparently, most economists are only able to detect power warping free market outcomes if: (a) the participants intend to warp and (b) the warping mechanism is the size of Standard Oil: that is, if a giant monopoly is at work.

The perception that power permeates every action in the free market -- perhaps especially in the labor market -- as it permeates everything else in human relationships seems lost on most economists (especially of the Republican or U. of Chicago brand). That hand weavers in Britain made a decent living before industrialization, but a hundred-times more productive steam loom operators (and their families) were reduced to living on oat cakes three times a day because they could not afford wheat bread seems not to arouse the suspicions of "hidden hand" devotees.

Shouldn't they of all researchers suspect there could be two hidden hands?

Right now, the average income of the top-fifth of American families is $250,000 a year (if you adjust the US Census $176,000 for top-coding) -- which is the average income of the better paying medical specialties -- certainly not typical top-fifth income. We know the excess has all been going to the top 1%...

...in America, that is...

...not in Europe where their different labor history has taught them the absolute necessity of maintaining heavy bargaining power vis-a-vis management. (Nor does the European right-wing object to heavy unionization, nor even to normal benefits: mostly to over regulation and the automatic dole -- take that, Newt Gingrich.) Equally as important as unionization is how you unionize: in Europe, nation-wide and sector-wide collective bargaining avoid the race to the bottom (Wal-Mart is closing 88 box stores in Germany because it cannot compete paying same pay).

Meanwhile back in the de-unionized (never sector unionized) US, 25% of workers now earn less than the pretty standard European minimum-wage, $9.50/hr, not even counting extensive paid time off and full medical coverage. Which pretty well fits with 25% of Americans now living below a realistic poverty line (see, 2001, Raise the Floor for details: today's official fed line has been adjusted for price of food only for 50+ years!) -- up from 14.5% in LBJ's time, though average income has doubled since!

Our economic researchers need to come up with an new "theory of everything" that assimilates the dimension of bargaining power into their equations.

Posted by: Denis Drew | Aug 1, 2007 12:19:29 PM

Posted by: Denis Drew | Aug 1, 2007 12:19:29 PM

...
Our economic researchers need to come up with an new "theory of everything" that assimilates the dimension of bargaining power into their equations.

Certainly not ... a quest for a theory of everything undermines efforts to understand the actual of economic power in economic institutions. After all, one of the main appeals of traditional marginalist theory is the tremendous variety of problems that it can fail to explain. Theories grounded in in reality tend to have a more limited scope.

Posted by: BruceMcF | Aug 1, 2007 1:17:32 PM

Posted by: Marshall | Jul 31, 2007 5:22:47 PM

One of those lies is in fact true. Unfortunately, my economist said the opposite.

The Euro is actually pretty bad. Too bad the collected doltish economists of Europe are its most vocal constituency.

I reckon you and FP are both right. Having a common currency is the only way the main industrial nations of the EU can proceed in the face of the ability of speculators to tear apart an exchange rate mechanism. Of course, that's the part that the traditional marginalist economists think is bad.

Running the Euro monetary policy in the interests of the financial sector, rather than the economy as a whole ... that's far from good. But that's the part that the traditional marginalist economists are enthusiastic about.

Posted by: BruceMcF | Aug 1, 2007 2:33:29 PM

1. It's not wages that should track productivity, its compensation (wages plus benefits like health insurance).

If the price of health care, for example, is exploding and health insurance is rising to meet it then wages plus benefits may be increasing, but the actual real wages of the worker may not.

As such, wages not tracking productivity for the last 30 odd years is big news -- and that this decoupling of productivity and wages happened when the labour market became more in-line with economic ideology by the attack on organised labour (unions) is also big news.

That certain sections of the economists profession should be seeking to deny this is, of course, not big news as economics has always been an ideology which supplies what is demanded by the wealthy.

Posted by: Anarcho | Aug 2, 2007 4:40:08 AM

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