Tuesday, September 29, 2020

The Microeconomics Anti-Textbook: a brief update

 I will be submitting the manuscript for the second edition of The Economics Anti-Textbook within a couple of months. As a more accurate reflection of the subject matter, the new book will have the title The Microeconomics Anti-Textbook. The content has been quite extensively revised and updated. The book will have a new postscript examining the (rather dismal) textbook treatment of climate disruption.

Thursday, April 23, 2020

Greed in the Disney boardroom denounced by Ms. Disney

A recent article in The Guardian caught my eye because I am in the midst of revising and updating the part of Chapter 7 in the Anti-Textbook that deals with CEO pay and whether that can be explained by the conventional supply and demand story. It describes the sharply critical views of Abigail Disney (pictured here) who is unimpressed by Disney employees facing mass layoffs while the company shovels $1.5 billion to senior executives and stockholders. (A web search will uncover many more articles about her critique of the "insane" pay given to the current chief executive.)

The article details some of the payments to senior executives. The outgoing CEO was paid 900 times the amount paid to an average Disney employee. The new CEO, according to the report, could receive a bonus of "not less than 300 percent of salary" and a long-term incentive payment of "not less than $15 million". A nice floor to have put under one's earnings no matter how the company performs.

As part of my background work for the book, I have surveyed 10 representative North American introductory microeconomics textbooks on many topics. On this particular topic, eight of the 10 books mentioned the issue of CEO/senior management "compensation". Remarkably, not a single one directly connects issues of corporate governance with CEO pay, despite the prominence of this theme in the academic literature. Not a single one describes how CEO pay is actually determined.

In public corporations, it is typically the job of a compensation committee of the Board of Directors to determine this. As you know, Boards of Directors are there to look out for shareholders interests, at least on paper. For fun, I am going to quote Warren Buffett's views on compensation committees:

"The typical large company has a compensation committee," said Buffett. They don't look for Dobermans on that committee, they look for Chihuahuas." He paused, amid laughter, then added: "Chihuahuas that have been sedated."

I decided that space limitations prevented me from extending the quote further, but the report from Money magazine continued, quoting Buffett's business partner Charlie Munger who added: "I'd rather throw of viper down my shirt front than hire a compensation consultant." (Compensation consultants or people who make their living advising compensation committees about how much the CEO is worth.)

Obviously Buffett and Munger have not read the introductory textbooks that could explain to them the error of their ways.

Or perhaps they have read the nonmainstream introductory textbooks, every one of which discusses the actual issue. I will be quoting from Understanding Capitalism by Samuel Bowles and his co-authors who explain quite clearly the influence that the CEO has over the whole process. (If you are interested in the details, you can still do no better than the 2006 book Pay Without Performance by Lucian Bebchuk and Jesse Fried. Despite some tinkering with the regulations and attempts to improve shareholder say over senior executive pay, the book remains sadly relevant.


Sunday, August 4, 2019

Yet another deadly global externality

Many people are quite rightly worked up these days about what Nicholas Stern called the biggest market failure ever – namely the human decisions that are leading to climate change. Not nearly as many people are worked up about the human decisions that are contributing to another global externality – namely the creation of antibiotic resistant bacteria. I am putting a section about this in the chapter on Externalities in the second edition of the Anti-Textbook.

There is a very nice article on the subject in today's New York Times. It's a case study of the difficulty of dealing with this problem because, at its root, is the usual suspect: profit maximization combined with the hamstringing of governmental regulation by corporate power, in this case the power of the livestock and poultry industries. Yes, I know, relative to the size of the economy as a whole they are a drop in the bucket, and yet (to mix metaphors) the tail wags the dog.


The Times has produced an excellent video that tells the story in just a few minutes. Have a look:


Friday, July 26, 2019

A conversation with Samuel Bowles

The University of California Berkeley has a long-standing series of conversations with interesting and important thinkers. Right now, the most recent one is with economist Samuel Bowles, the author most recently of The Moral Economy.  If you are interested, here is a link to a review of the book:
It's a wide-ranging conversation that covers his intellectual development as an economist, particularly his growing disillusionment with it as a graduate student and a young academic in the late 1960s and early 1970s. He makes the case that economics has changed a lot since that time and for the better.

Unfortunately, the teaching of introductory economics has not reflected these developments in the discipline. He has an article with Wendy Carlin that will be published in the near future in the Journal of Economic Perspectives entitled "What students learn in Economics 101: Time for a change"; the manuscript for this is available on the web.

Bowles has been a key force behind the Curriculum Open-access Resources in Economics (CORE) project that has developed a new textbook that is trying to be a force for change in the right direction.

Here is the link to the interview. Well worth listening to!


Friday, June 28, 2019

A textbook on the supposed cause of the 2008 recession

While surveying the textbooks to see how much content they devote to behavioural economics, I was surprised by a claim in the new text by William Baumol, Allan Blinder and John Solow – Microeconomics: Principles and Policy (2020). Like most texts, this one has a brief discussion (pages 91-93) of behavioural economics. Its importance for microeconomic behaviour is dismissed, but they do claim that irrational behaviour in stock markets can have a large effect on the overall economy. The example they give is truly bizarre:

"… irrational behavior can have an enormous effect on the economy. Returning to our stock market example, when investors rush to sell their stocks simply because they see that others are selling, the result may be an abrupt and prolonged decline in stock market prices. This irrational selling behavior can trigger the process that drives the economy into recession. The Great Recession of 2007–2009 is only one of many historical examples of recessions that have been triggered by stock market investors who irrationally followed the behavior of other investors (i.e., herd behavior)." (P. 93, my emphasis).

Apparently the bursting of the housing bubble in the United States and the cascading effect that it had on financial institutions, culminating in the collapse of Lehman Brothers on September 15, 2008 was no cause for alarm.