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May 16, 2007

Why People Hate Economists; Cont'd

From Bruce Webb in comments:

Economics does not have good answers about equitable solutions because that is not the question they are asking themselves. If efficiency is the starting point then Free Trade based on Ricardian Comparative Advantage becomes a slam dunk winner. Once you define efficiency as GDP without attention to distribution. And if you combine this approach from efficiency with the belief that labor is always and everywhere fully compensated at its level of marginal production then it is no wonder economists shake their heads at being so misunderstood. Given the problem they have set themselves out to solve and given their assumptions on compensation the rest follows.

Which is fine but also a reason to keep these guys far away from the policy shop, the real world has a power component that their models simply don't accomodate, pricing power exists in many forms and arguing for a particular trade policy from within a framework that does not fundamentally acknowledge that is simply to play into the hands of the people who in fact exercise that pricing power.

...[Economists] start from the premise that there is no fundamental struggle between workers and capital, they assume that markets will somehow deliver equitable solutions or worse not even consider that a useful question. Whereas if you start from the position of equity, of rationally dividing returns on productivity by actual contribution to production you may not in fact reach the most efficient result.

Bruce's point on power is particularly important. One reason many political observers dismiss certain strains of economic thought is that too much else is held equal, including political, social, and financial power. I had dinner with a prominent economist recently, and I brought up Krugman's line that economists haven't yet figured out how to incorporate power into their models. My friend smiled, and said, "when someone models it, I'll take it into account." Well, great, but people are listening to you now.

May 16, 2007 in Economics | Permalink

Comments

I'll return to my comments from time to time in the past: In their pursuit of a 'science' of economics, models and math have been raised up to being the holy grail by economists, and they have steadily become more divorced from the 'political economy' that was the source of the discipline. Tenure and acclaim within that discipline don't go to those who deeply think about and publish to inform overall public policy (I'm thinking of J.K. Galbraith as a major exception, but there are/were others).

Political 'Science' is now similarly divorced from the real world of public policy, mostly. We are ill-served by our academic institutions, the professional academic associations, and the whole apparatus of academic prestige-making.

God forbid that an untenured professor write a book directed at the public at large: not only will the book be ignored as a professional contribution, it will be held against them as inattention to what really counts.

So, we get only what the think tanks provide, and they are principally driven by the beliefs of their major contributors and the partisan bias of the think tank that is the result.

Posted by: JimPortlandOR | May 16, 2007 11:53:14 AM

like I said- pseudo science is the problem.

Posted by: akaison | May 16, 2007 12:12:27 PM

"If efficiency is the starting point "

And the argument for efficiency being the starting point is, in itself, a critical problem. The argument for efficiency is not scientific, but rather normative (a philosophic argument, in other words).

Posted by: burritoboy | May 16, 2007 12:22:06 PM

I think economists are very aware of the tensions between capital and labor. But they also put the problem in a proper context: many of the solutions that get proposed end up being worse than the actual disease:

Old-school welfare creates negative incentives for the poor, very high marginal tax rates (we forget they used to be 70-something percent) limit wealth creation, and inflexible labor regulations make businesses resistant to hiring marginal workers.

So-called "conservative" solutions -- health care vouchers, education vouchers, welfare-to-work, private social security accounts -- are intended to correct for these negative incentives. Which isn't to say that they are perfect either; but they are much better than Galbraith-era social safety nets. The world is full of trade-offs, and many ignore the fact that programs like redistribution come with cons.

Quite frankly, it is total bullshit when the Left says conservatives don't care about the poor. The genesis of my political apostasy from the left to the right (which was about a year ago) came about when I realized that terms like "redistribution" and "social safety nets" are not as clean-cut as the Left makes them out to be. While the Left might have heart, it means little if you do more damage than good. So I think the Right cares about the poor more/

Posted by: Jason | May 16, 2007 1:39:06 PM

This shit drives me crazy! When people lump all economists into one category - neoclassical economists - they discount the work of the vast majority of practicing economists today. There are so many other schools of economics besides neoclassical thought, but since NCL has crowned itself king, other schools of thought are forced to argue on its premises. This is, of course, despite the fact that schools like Radical Political Economy or Institutionalism take totally different premises than neoclassical economics.

And Jason - sounds like you need to read "American Dream" - to cut is to care, remember? Oh wait.

Posted by: senior | May 16, 2007 2:14:54 PM

"There are so many other schools of economics besides neoclassical thought"

Which are about as relevant to policy and politics as Critical or String Theory.

Posted by: bob mcmanus | May 16, 2007 2:47:08 PM

Economists may not have figured how to model power yet, but that doesn't mean they don't take it into account. They just have to do it in an ad hoc, impressionistic or intuitive way. Not all economists ignore everything that isn't a variable in a formal model.

But this brings back part of the original point in today's posts about economists. One reason we keep such a focus on raw GDP is that it represents power. Economic power is raw power, to a great extent, and it helps us get and secure everything else, including military power. We live in a typical, modern fevered state driven in large part by lusts for more of almost everything, which have their unhealthy aspects. When we notice the fever and long for a healthier life, we (a collective we that goes beyond individuals) see that we risk weakening ourselves in relation to other nations that we compete with for goods of all kinds, including our own present possessions. Some see explicitly and some feel implicitly that this weakening lessens our security in various ways, in addition to interfering with our fevered desires. So we keep our eye on the GDP, as the aggregate measure that tells us about more and whether we can maintain our power. Our notion of efficiency reflects this too.

This is especially true for Americans, where we seem to have both more and fewer choices about power than, say, France, which in part depends on us and borrows from our power. That is, we have the choice to be a superpower, and also the seeming necessity to do so, rather than to let some other power have sway over us.

On the small scale, individuals and small groups can partially opt out of the fever, but the engine that drives it is strong, and, in the partial state of nature (ruthless competition) we still exist in, especially internationally, trying to slow the engine would likely leave us in the dust eventually. So we stick with the fever and survive and lust another day.

Posted by: Sanpete | May 16, 2007 2:47:54 PM

This:

My friend smiled, and said, "when someone models it, I'll take it into account."
is precisely the attitude that the Post Autistic Economics Network are referring to as Autistic Economics ... "put an aspect of reality into the framework I am working in, or else I will not be able to cope with it."

Posted by: BruceMcF | May 16, 2007 3:17:28 PM

Mind you, throughout this should be "marginalist economists", since there are economists in approaches like American Institutionalist Economics that take power into account, do not refuse to see something if it cannot be quantitied, etc ...

... indeed, there are even economists hamstrung by a training restricted to marginalist economics who struggle to try to provide scientific explanations for things in the economy. Mind you, as (American Institutionalist Economist) economic historian Anne Mayhew describes, often their work seems to be like an explanation of how to get from New York to Boston via Terre Haute, where one may be at the same time impressed by the quality of the explanation and puzzled as to why one would take such a circuitious route.

Posted by: BruceMcF | May 16, 2007 3:24:03 PM

We have models of negotiation which include discussions of power. Your prominent economist friend just isn't bothering to acquaint him/herself with the literature.

Posted by: Kimmitt | May 16, 2007 3:59:47 PM

"If efficiency is the starting point then Free Trade based on Ricardian Comparative Advantage becomes a slam dunk winner. "

No. It doesn't. Ricardian Comparative Advantage says that resources should be devoted to a nation's most productive sectors, Free Trade says that resources should be devoted to those sectors in which the return on capital is greatest. They aren't the same thing, and in a world with widely varying wages, they are likely the complete opposite. Give English shepherds a union, paid vacations and a dental plan, and we're all drinking Chateau D'Liverpool.

Posted by: msw | May 16, 2007 4:55:00 PM

msw -- Smithian Absolute Advantage says most productive. Ricardian comparative advantage says "comparatively most productive."

Posted by: Kimmitt | May 16, 2007 6:24:36 PM

How about this way to factor power into the economic model: "The psychological is to the physical as three is to one." Can sometimes be as true in economics as in war.

Example: the same phenomenon that allows CEOs to make twenty times what they once did also allows the lowest tech workers in an ever higher tech economy to keep up with average income growth. As long as the folks who otherwise put the bargaining pressure (power) on are making lots of money -- then everybody is allowed to make money.

Recent example is the lowest paid workers almost keeping up with average income growth during the double bubble (return of high productivity gains + the dot com bubble) in the late 90s. Alternately in hard times the squeeze is on and it will never happen (in America's unionless workplace). Ditto if really hard times ever hit corporations -- shareholders will watch much more closely -- firms not likely to hit really hard times as long as unionless employees can be wrung out.

In case where the psychological is ascendant, you simply don't have to keep too good track of the economic model -- it is only 25% of the picture.

Does that help anybody? :-)

Posted by: Denis Drew | May 16, 2007 6:26:55 PM

Kimmit - that's what I said. "Ricardian Comparative Advantage says that resources should be devoted to a nation's most productive sectors." Maybe that wasn't that clear. Whatever your nation does best is what they should do, according to Ricardo. Other goods should be traded for. Free trade says that you nation should focus on whatever yields the greatest return to investors and should trade for all else. Comparative advantage favors total productivity - both wages and profits count. Free Trade only cares about profits. In the canonical example, the fact that England was a better place for raising sheep than for growing grapes lead him to conclude that England should make wool and trade for Portuguese wine, instead of making both. The Free Trader needs to know how much of that wool will be given to the shepherds and how much will be given to the landlord before he can decide. If working conditions for shepherds are better than wine-makers, then we end up with English wine.

Ricardian Comparative Advantage results in a larger total pot, but needs trade controls to implement. Free Trade may very well be a negative-sum deal.

And, a capital-rich, high-skill nation like the US should be in manufacturing, not "services" , or whatever it is we're supposed to be exporting these days. My personal hatred of economists is that they ignore their little theories whenever they find it politically convenient.

Posted by: msw | May 16, 2007 7:59:57 PM

Heh, that'd be true if we hadn't gone beyond Ricardo and into Heckscher-Olin....

Posted by: Kimmitt | May 16, 2007 10:54:29 PM

"One reason many political observers dismiss certain strains of economic thought is that too much else is held equal, including political, social, and financial power."

Tehre are indeed those who model power. James Buchanan, Gordon Tullock? Public choice economics?

Ah, yes, sorry, of course you wouldn't accept them as they worry about how appallingly the State does things as a reswult of their analysis of power.

Posted by: Tim Worstall | May 17, 2007 8:18:49 AM

"And, a capital-rich, high-skill nation like the US should be in manufacturing, not "services" , or whatever it is we're supposed to be exporting these days. My personal hatred of economists is that they ignore their little theories whenever they find it politically convenient."

A high-skilled workforce should be on the assembly line? Hardly. Now, you might mean we should be in the business of manufacturing: overseeing the overall process. That is what "services" means.

Posted by: Jason | May 17, 2007 9:19:50 AM

Free trade says that you nation should focus on whatever yields the greatest return to investors and should trade for all else.

That might be your definition of free trade, but that isn't what free trade really is. What you are doing is seizing on the short-term tectonic shifts rather than the long-term process.

It is like saying freedom of speech is bad because just the other day I saw the KKK marching at City Hall. That ignores the vast majority of speech that has a positive impact.

No one is discounting that increasing globalization has brought hardship for many American families. But that doesn't mean that the overall outcome is a regression, or that only capital is gaining at the expense of labor.

Free trade -- no protective tariffs, no agriculture subsidies, the free movement of goods, services, and capital -- is the fulfillment of Ricardian comparative advantage. Free trade is built on the idea that individual actors, with their own local knowledge, can make the best decision about what makes them the most productive.

Posted by: Jason | May 17, 2007 9:32:57 AM

"Old-school welfare creates negative incentives for the poor, very high marginal tax rates (we forget they used to be 70-something percent) limit wealth creation, and inflexible labor regulations make businesses resistant to hiring marginal workers."

All faith based assertions. The middle class thrived with 90% marginal rates in the 1950's and did quite well with 70% rates in the 1960's. And 'marginal worker' builds in its out assumption about compensation and productivity.

There is no doubt that cutting top marginal rates creates wealth. For the wealthy. Which isn't some argument that supply-side Laffer curve reinvestment actually works, it is an acknowledgement that if you cut the top rate from 50% to 35-38% and capital gains to 15% the wealthy retain more of their earnings. Well no kidding, give me an extra 12-25 points on my investment and I expect I will do fine as well.

Posted by: Bruce Webb | May 17, 2007 11:08:03 AM

You are the one making faith-based assumptions:

The middle class thrived with 90% marginal rates in the 1950's and did quite well with 70% rates in the 1960's.

"Thrived" is hardly quantifiable, nor do we know how wealthy people might have been with lower tax rates.

And 'marginal worker' builds in its out assumption about compensation and productivity.

Tell that to the immigrants who can't get jobs in France, and where the French government has to subsidize them to stay away from the labor market.

There is no doubt that cutting top marginal rates creates wealth. For the wealthy.

The wealthy... oh, you mean the people who take the risks to start the companies that create our jobs? Sure, not all of them do that. But 90% tax rates make sure all of them don't, and why continental Europe struggles to keep their GDP up.

There was a study by Joe Stiglitz, a liberal economist, that concluded that the best tax rate on the rich would be a negative rate, since they are the most productive members and benefit society the most. Of course, I don't believe we should eliminate the progressive tax system. But it does go to show the negative incentives of taxing the rich at 90%.

Posted by: Jason | May 17, 2007 4:26:36 PM

Kimmit -

In what sense have we "gone beyond Ricardo". Certainly not in the "economists don't mention his name every time trade comes up" sense.

And Heckscher-Ohlin, the favorite of economists who really like to exercise their "rejection of empiricism" skills.

Posted by: msw | May 17, 2007 5:31:08 PM

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