Saturday, August 28, 2010

Perfect competition in agriculture?!

Textbooks trying their best to make a case for the relevance of perfect competition -- the type of market structure described by the ubiquitous supply and demand framework -- sometimes claim that "Agriculture also fits fairly well in most ways since individual farmers are clearly price takers" (the Ragan and Lipsey text, as quoted in The Economics Anti-Textbook, p.56). As we then pointed out, "many farmers ... are increasingly squeezed by the market power of the few firms that supply their inputs and the few buyers of their outputs". So yes, individual farmers may be price takers, but that doesn't mean that the markets are competitive. Individual farmers are price takers in a monopsony, where one buyer dictates the price in the same way that one seller dictates the price in monopoly.
  Here's a link to a new study on "Buyer Power in U.S. Hog Markets", a working paper put out by the Global Development and Environment Institute at Tufts University. It describes a market that can be called oligopsonistic: one where a few buyers in the market have significant market power.


Tuesday, August 24, 2010

Bacteria and externalities

The Economics Anti-Textbook accuses the standard texts of downplaying the importance and ubiquity of externalities. One of the examples that never made it into the book (because of the need to keep Chapter 7 from getting too long) was that of the over-use of antibiotics, much of which are fed to animals kept in close quarters in the industrial food system. This involves an externality because the use -- and particularly the mis-use) -- of antibiotics speeds the evolution of antibiotic-resistant bacteria, which will lead to significant trouble in the future. The cost of speeding up the arrival of that trouble is not being borne by the users of antibiotics today. I was interested to see towards the end of this gloomy article in the Guardian, a mention of the idea of a Pigouvian tax to address the externality problem.


Friday, August 20, 2010

Reclaiming the principles course

Another academic year begins soon (in the northern hemisphere, at least) and a new wave of students will soon be exposed to their first economics principles course, likely one in microeconomics. How should such a course be handled by lecturers dissatisfied with the standard fare?
  I've just finished reading an excellent essay on that topic by Julie Nelson of Tufts University: ("The principles course", pp.57-68 in Jack Reardon, ed., The Handbook of Pluralist Economics Education, Routledge, 2009)
  Rather than a 'competing paradigms' approach, where orthodox and heterodox approaches are compared and students are invited to take sides, she suggests a 'broader questions and bigger toolbox' approach: "economics is defined so as to encompass a broad set of concerns, and methods of analysis are drawn from many different schools."
  The definition she suggests is one similar to what we discuss in Ch. 1 of The Economics Anti-Textbook. Nelson writes:
A good way to reframe the principles course is to think of economics as defined by the concern of economic provisioning, or how societies organize themselves to sustain life and enhance its quality. Such a definition is much broader than definitions of economics that focus on individual rational decision-making, markets, or GDP growth...
She adds:
Because it does not focus on individual rational choice, this approach can encompass social and economic institutions, real human psychology, and the unfolding of historical events. Because it is broader than a concern just with markets, it is inclusive of government and community activities, as well as the economic contribution of unpaid household labor. Because it points directly to questions of survival and quality of life, it invites questions about whether current patterns of wealth and income distribution, consumerist attitudes, and the use and abuse of the natural environment serve valuable ends. 
Nelson suggests labeling the core, mainstream models as the "orthodox model"  or "simple mechanical model" as a way of making it clear that "alternatives are possible" and to deflate the "implicit claim to abstract, appearing-out-of-nowhere generality" of the standard textbook approach. She also suggests
spending time discussing the assumptions of the traditional model. What is assumed about human behavior, about technology, about institutions, and the different social and economic forces acting in the world? what are some real-world phenomena that the models might plausibly explain? And, conversely, what phenomena might require different models? ... [T]he instructor need not show that traditional tools and concepts are wrong, but rather, by describing their highly restrictive assumptions, the instructor can enable students to understand the limited range of the models.
We share Nelson's conviction that the introductory (or principles) course is a critical one. It's the only one that many students will take and it's also often the one that determines which students will go on to take more economics courses. It (Nelson writes)
is the first step in socialization of the next generation of economists. Who will you inspire to advance in economics -- the student concerned about real-world economic issues and committed to trying to make the world a better place, or the student primarily attracted by the elegance of the models who has a special affinity to equation solving and curve shifting?