Thursday, December 30, 2010

Zombie Economics

One of the pleasures of writing a book is that you get to stuff into it all your favourite bits from others' writing that you figure other people should read. One that I put into The Economics Anti-Textbook (p.246) was Deepak Lal's "ideas -- good or bad -- never die in economics". I was reminded of this recently when, in Left Bank Books in St. Louis, I stumbled upon Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, 2010), written by Australian economist John Quiggin (whose blog can be found here). He's also a contributor to the economics blog, Crooked Timber.

It would have been tempting to buy the book just for the brilliantly-designed cover, but (having read a third of the book so far) the contents are good too.
  The zombies that Quiggin attempts to put to rest once and for all are inter-related: the idea of 'The Great Moderation' (the alleged taming of the business cycle after the 1980s), the Efficient Markets Hypothesis and its implications, the Dynamic Stochastic General Equilibrium approach to macroeconomic modelling, apologies for growing economic inequality ('Trickle-Down Economics'), and the alleged benefits of privatization of public enterprises and services.
  Each chapter is structured so as to chronicle the birth, life, and (what should have been the) death of the idea and its later re-animation in zombie form by those who refuse to admit defeat. A final 'After the Zombies" section recaps the lessons that should be learned from the experience and points a sensible way forward. A 'further reading' section points the way to the relevant academic literature.
  The book is written in a lucid and non-technical way and should be intelligible to upper-level undergraduates who have had the standard intermediate theory courses. Highly recommended!


Saturday, December 18, 2010

The empty world assumption

We mention all-too-briefly in The Economics Anti-Textbook the implicit 'empty world' assumption that underlies much of the simple economics presented to students. (See the quote at the beginning of Chapter 7.) Non-renewable resources get little attention as do serious environmental problems. There are no limits to growth -- a technological fix or an innovation spurred on by price signals can be relied upon to get us out of any jams.

  I was reminded of this attitude when I read the text of a recent talk give by Naomi Klein at TED. It's worth reading, but  I find her characterization of economists "mechanistic thinking" on the question of climate change a bit unfair. She doesn't cite anyone, so it's hard to be sure who or what she has in mind, but the best work -- like that of Nicholas Stern or Martin Weitzman -- is hardly "mechanistic" but gives a central role to the huge risks involved.

Tuesday, December 7, 2010

"Inside Job" -- the movie

I wish I could say, as Paul Krugman does today in his blog, that I'd been able to see the new documentary Inside Job about what led to the crash of 2008 and who was involved, but where I live the 'free market' (in the form of a monopoly that owns all the movie theatres) for some mysterious reason prefers to show only the most mindless Hollywood trash, the current opiate of the masses.

  It seems the movie is less than flattering about the role some economists have played. Krugman comments:
OK, about the economist-bashing: I thought it was basically fair. There aren’t, I think, all that many cases when economists are literally paid to offer a specific opinion — although Greenspan’s defense of Keating qualifies. But the movie didn’t say there are. What it suggested, instead, was a kind of soft corruption: you get paid a lot of money by the financial industry, you get put on boards, but only if you don’t rock the boat too much. Besides, you hang out with these people, and get assimilated by the financial Borg. I think all of that is very true.
I like that idea of "soft corruption". Is this what goes on in the textbook market too? A successful author is paid a lot of money, "but only if you don't rock the boat too much". In contrast to his kick-ass columns for the Times and his blog, Paul Krugman's own introductory text doesn't rock the boat any more than average. (I haven't seen the second US edition, but I'd be shocked if it gave any reader even a twinge of seasickness.)
   His second point -- the intellectual assimilation that takes place from hanging out with people -- is an almost inevitable by-product of our make-up as social animals. A few resist it, but not many. I certainly didn't when I was an economics student...


Thursday, November 25, 2010

A quick note on "Foundations of Economics: A Beginner's Companion"

Somehow Tony Myatt and I spent many years talking about the subject matter of The Economics Anti-Textbook and then writing it without stumbling upon Foundations of Economics: A Beginner's Companion by Yanis Varoufakis, then at the University of Sydney and now at the University of Athens.

But last week, after a friend urged me to work to combat the indoctrination of economics students (rather than loaf, my natural inclination), I did finally stumble upon it after idly googling "economics students indoctrination". Google found the book with this because of Chapter 12.2 of Varoufakis's book is entitled "Economics courses as indoctrination", with subsections "The economists' narrative against cooperation", "The economists' dilution of the concept of social responsibility", "Teaching that value exists only if it can be quantified", "The economists' apology for inexcusable social failures", and "The economics profession as a priesthood". Obviously intriguing stuff.
   Varoufakis tries, in a general way, to do what we did in the Anti-Textbook: to set out what he sees as the essence of the theory and to critique it, but adding in along the way some intellectual history about where these parts of the subject came from in the first place. I ordered a copy immediately and it arrived today. I'll write some more about it here in the future when I've had a chance to delve into it properly. 
   As the image above suggests, you can have a peek inside the book on the Amazon website. The publisher's list price is steep (US$80 or so for a paperback, at least in North America), but it's a 400 page book that any serious economics student should not be without. Get someone else to pay for it; ask for a copy for Christmas!


PS: You can also find used copies at half price. In looking for used or out-of-print books, I often use this search site, which looks in many databases.

Wednesday, November 17, 2010

A comic interlude

An Economics Anti-Textbook reader sent us this link to amusing comic strip that pokes fun at economists' neglect of poverty (or really, the textbooks' neglect; there are economists doing very good work on poverty and inequality issues). Note: the final panel appears when you hold the mouse over the red dot at the bottom left, just below the comic strip.


Saturday, November 13, 2010

Subversive teaching assistants wanted

Graduate students are often employed as teaching assistants (TAs) in the larger universities, meeting students in small tutorial groups. These allow for discussion and interaction that is impossible in the huge lecture theatres commonly found in the modern educational factory. The setting allows an enterprising TA to open some eyes with good examples and questions. For an illustration, check out this amusing blog entry "What I taught students in my first TA session", written by an anonymous American grad student.


Saturday, November 6, 2010

Right-wing money for students

If you look, there's no shortage of good comment these days about the rich people's money behind the Mad Hatter's Tea Party movement in the US. George Monbiot identifies billionaires Charles and David Koch of Koch Industries as a major force. 

Along with the Kochs, a portion of these Tea Party types seem to subscribe to some version of what could be called 'classical liberalism' or 'libertarianism'. 
   I was reminded recently of right-wing money's efforts to recruit students to the cause with the lure of money  and internships.
   Our department got a mailing from The Institute for Humane Studies at George Mason University. The slogan "Advancing Liberty. Advancing Careers" has a certain ring, doesn't it? You can pursue your self-interest, while feeling good about yourself because you are also advancing "liberty", and who can be against "liberty"? Scholarships, fellowships, internships and seminars are available for right-thinking students to plug into the huge right-wing propaganda network in the US. One of the things available is a "Charles G. Koch Summer Fellow Program". Yes, that Charles Koch, the Mad Hatter.
   Here's how the Institute for Humane Studies put their mission:
If our country is to enjoy enduring freedom and prosperity, it is critically important that today’s college students—tomorrow’s opinion leaders—understand the benefits of a free enterprise system and its foundation in the values of individual liberty and responsibility. The Institute for Humane Studies is meeting this challenge by teaching students about the principles and practice of freedom and cultivating a new generation of professors, journalists, policy experts, and filmmakers who have the potential to advance liberty in their careers.
  The mailing we got included inspiring posters like the one above and this gem:

Writers for Liberty | Journalism Internships Flyer

I showed it to a colleague who shuddered. He wondered if it was just coincidental that the style reminded him  somehow of 'socialist realism' and the workers and peasants gloriously march into a bright new future...


    The billionaire Koch brothers, while not busy stoking the fires of the Tea Party revolt have foundations that lavishe money on not only the Institute for Humane Studies, but also George Mason University itself, where the Institute for Humane Studies locates to give itself academic cover and a veneer of respectability. GMU's economics department in particular has cashed in.

    One of the points of The Economics Anti-Textbook was to urge students to think for themselves when they go into an economics course, and to try to give them some pointers on how to do that. Our focus, naturally, was on the mainstream textbooks with their subtle 'free-market' message, but that is only one part of the environment in which students may find themselves. 
    Economics deals with the issues at the very centre of the struggle for wealth and power in our societies, a struggle that dominates most aspects of politics and public policy. For that reason, economics education must be a primary target of those who want to make sure that economists are trained to think in the right way and to pass those views on to the next generation. The Institute for Humane Studies at GMU is only one example of a much broader effort in the US. (It's not just the US; in Canada, the Fraser Institute is also has programs targetting students, as well as their teachers. No doubt those of you in places like the UK or in Australia can find similar examples easily enough.)
   I imagine that most of the young people going to George Mason University (a public university!) and studying economics have no idea in advance of the attempted brainwashing they will be subjected to. Sadly, a copy of The Economics Anti-Textbook is not (yet) in the GMU library...


Thursday, November 4, 2010

"A new economics for the 21st century"

That's the title of a short essay recently written by Neva Goodwin of Tufts University (who is also one of the authors of Microeconomics in Context an introductory text we explicitly excepted from the criticisms leveled at the 'standard' texts in The Economics Anti-Textbook). She begins the essay with these words:

The critical role for economic theory is no longer simply to explain how the existing system works, but also to explore how the economic system can be changed to become more adaptive and resilient in the face of the challenges of the 21st century, and how it can be more directly designed to support human well-being, in the present and the future.  Simultaneous changes are needed, in both the actual economy (how it functions, by what rules, how it can be made responsive to constraints) and also in economic theory.
 The economic theory that was accepted as standard in the non-communist world during the second half of the twentieth century erects serious impediments to meeting the challenges of the twenty-first century.  
 Her list of 'serious impediments' is an interesting one; some of them we identified in the Anti-Textbook, some we missed, while others, more macroeconomic in nature, were beyond the scope of our book.

 She goes on to sketch out "two overarching concepts" that could be thought of as "final goals" for any economy, in contrast with intermediate goals that would be things we'd need to do to help attain the final goals (for example, reductions in inequality, or more consumption for those suffering shortfalls in absolute needs). The first final goal is "well-being and equity in the present"; the second is "productive capital for the future", not only the capital of the standard textbooks (plant, equipment, infrastructure), but natural resources, human health and education, and cohesive social systems.

Mainstream economic theory, as reflected in its textbooks, takes a narrower approach while viewing "the economy as separate from its social and ecological contexts". Goodwin asks:
So what is the alternative? There are, of course, many: ecological, radical, feminist, social, humanistic, old and new Institutionalist, old and new Keynesian, and many other kinds of economics. Each of these emphasizes one part – sometimes a critically important part – of what is missing in the standard approach. But it doesn’t work just to plug in something new: there’s too much wrong with the whole approach. It is necessary, I believe, to start afresh, using as building blocks the best pieces from each of the various alternatives, as well as from standard theory, but fitting them all into a new design 
-- a design she calls "Contextual Economics" that recognizes that
 an economic system is embedded within a social context that includes ethics, norms and human motivations, and the culture that expresses them. It also includes politics – that is, the deployment of economic and other kinds of power – as well as institutions, and history. Equally important is the recognition that an economic system is embedded within a physical context that includes the built environment, as well as the natural world from which all the materials we use  ultimately derive. The health of any economic system is absolutely dependent on the health of these embracing contexts. 
That works for me, but it's a long way from the picture given in the economics textbooks on which I was raised.

Wednesday, October 27, 2010

The upside of bad textbooks

Mainstream introductory economics textbooks have so many weaknesses it's hard to know where to start listing them. But for the sake of context let's just have take a scatter gun approach. So, in no particular order these weaknesses include:
1) the pretense that people are rational and disciplined.
2) the pretense that more things make us happy.
3) the pretense that markets are mostly perfectly competitive.
4) the pretense that the economy can be studied in isolation from the political and legal systems.

Don't worry. I haven't run out of weaknesses. But my point in this blog actually isn't to discuss the weaknesses per se. Rather it is to wonder whether bad textbooks aren't a blessing in disguise for the good teacher. After all, they provide a wonderful focus for critical commentary. And in the process  of critiquing the textbook, perhaps students become aware that just because something is written in a textbook, that doesn't mean to say it is true. Perhaps the process of having a bad textbook, and a lively critique of the book in class, provides critical awareness of how the subtle process of persuasion operates.

What do you think? Is there an upside to bad textbooks?

Production and costs, real and imagined

I don't know about you, but for me the dreariest part of any microeconomics course is the part dealing with production functions and cost curves. I've reached that point in a managerial course I'm giving and, for once, I have a text that gives a reasonably good discussion of the empirical evidence (Paul Farnham's Economics For Managers, 2nd ed.). Of course, the text first spends most of its space setting out the usual stuff, devoid of empirical content. But a few pages (pp.132-135) at the end explain some of the problems with the simplistic U-shaped average cost curves and upward-sloping marginal cost curves.
  One of the first confusions of the traditional textbook production function Q = f(L,K) is that it's really a story about the production of value-added, not output. Students often wonder where raw materials are, or electricity, and so on, all products purchased from other firms. They are not there because value added is the value of the firm's output less the value of the inputs it buys from other firms, leaving the value added by the labour and capital employed in the firm itself.
  Farnham's text doesn't mention this issue, but an even more important confusion is well explained. It is a confusion of stocks and flows.
  Properly interpreted, Q is a flow of value-added that comes from a flow of labour services (L) and a flow of capital services (K). Yet in the story of the "short run", we are told that K is "fixed". But what is meant is that the stock of capital is fixed, not the flow of services from it.
  Once this is clear, then it's easy to understand why the so-called "law" of diminishing marginal returns is not observed in practice. To quote Farnham (p.134):  
Much research has indicated that inputs in these settings [ie manufacturing and industry] are likely to be used in fixed proportions up to the capacity of the plant. Although the stock of a fixed input is fixed, the flow of services from that stock may be varied and combined with the services of the variable input in fixed proportions. The size of a machine may be fixed, but the number of hours it is put in operation can be varied. Both capital and labor services are variable in the short run and can be changed together in fixed proportions, thus preventing diminishing returns and rising marginal costs from occurring in many manufacturing operations.
  Naturally, almost every other cost curve in the rest of the book reverts back to the 'textbook' model that lacks any solid empirical support, the usual practice of 'note-and-forget' that we point out in the Anti-Textbook as a favourite technique of authors who don't want the facts to get in the way of a useful story. Still, Farnham's treatment is far better than is normally found in most texts.
  Farnham also discusses a reason for the deviation of the text's model from reality. He suggests that the text's model of production is really a model applicable to agricultural production, where we can imagine a crop (perhaps Halloween pumpkins?) being grown on a fixed amount of land with labour working the land. He writes (p.132): "There is no need to distinguish between the stock of the fixed input, land, and the flow of services derived from it. The land provides services continuously and is not turned off at night."

  So, to sum up in the form of a supplementary "Question for your professor" to add to the questions in Chapter 5 of The Economics Anti-Textbook:

Isn't the short-run production function in the text confusing the stock of capital with the flow of services from it? If we properly make the stock-flow distinction, doesn't the story of diminishing marginal returns fall apart?


Friday, October 22, 2010

"The Skeptical Economist"

As we were finishing The Economics Anti-Textbook, Jonathan Alred published a very fine book -- The Skeptical Economist: Revealing the Ethics Inside Economics (Earthscan, 2009). ('The Skeptical Economist' was also a title that we had considered when developing the Anti-Textbook.)
You can have a peek via google books. This, and Moshe Adler's Economics for the Rest of Us (mentioned here recently), and others, made me think that we were catching a wave, that something about the times was prompting these critiques of the way mainstream economics is presented.

Monday, October 18, 2010

Should people voluntarily take external costs into account in their actions?

From what I've seen the microeconomics texts don't ask this question. They simply make the assumption that the rational narrowly-self-interested person does not do that and has to be compelled to do so by a Pigovian tax, for example. Does this assumption of socially irresponsible behaviour subtly legitimate it and influence students' own attitudes and behaviour?
  I only really thought about this implicit assumption myself when I saw a book that was different: Avi Cohen and Ian Howe's Microeconomics for Life: Smart choices for you (2010, Pearson Canada), a new introductory book that is also unique in having no diagrams(!). They state that people should take all costs into account, both those they face privately and those they impose on others. Writing about 'smart choices' for businesses, they say: "Be sure to count all additional benefits and additional opportunity costs, including implicit costs and externalities." (p.194)
  Oddly enough, they don't discussing why a firm (or a person) should do this. Isn't the firm supposed to be maximizing profits? Apparently they're assuming something beyond narrow self-interest. (If a government had already imposed an appropriate Pigouvian tax, that would appear as an explicit cost like any other, and would require no special consideration.) Of course, a class using the book could be prompted by the instructor to think about this in more detail. To what extent to businesses have leeway to raise their own costs voluntarily? How would they know what the appropriate action is in the absence of a price signal like the Pigouvian tax?


Wednesday, October 13, 2010

Moshe Adler's "Economics for the Rest of Us: Debunking the Science that Makes Life Dismal"

Anyone having a look at this Economics Anti-Textbook blog will want to have a look at Economics for the Rest of Us: Debunking the Science that Makes Life Dismal by Moshe Adler, an elegantly-written and accessible book (as well as being very nicely produced). It can be read by someone even without introductory economics, but can be read with profit by anyone.
You can have a preview by looking it up at Google books: You'll see that it is divided into two parts. The first examines the concept of economic efficiency that dominates the textbooks in a way that I found very original and insightful. The second half of the book is a critical examination of theories about the most important prices in the economy (wages) which get the back-of-the-bus treatment in the theory textbooks, which spend much more time on output prices.
  I'd like to have the time to write a proper review of this book, but I'm a bit swamped right now. In any case, you should just get yourself a copy: the hardcover is a mere $22 on (The paperback edition will be out next June.)


Friday, October 8, 2010

Well-meaning policymakers and unintended consequences

I'm giving a course on economic inequality these days and as part of it I listened recently to an hour-long lecture on YouTube by Richard Wilkinson and Kate Pickett, the authors of The Spirit Level: Why Equality is Better for Everyone ("Inequality: The Enemy Between Us?" in 8 parts, highly recommended). At one point, Richard Wilkinson mentions the growth of inequality in the UK during the Thatcher years that resulted, in part, from changes in taxes and transfers and a reduction in trade union power. He notes that, according to the evidence put forward in The Spirit Level, this had long-term consequences that those responsible for those policies did not intend or foresee: a growth in social dysfunction, as reflected in growing problems with such things as obesity, violence, and teenage pregnancies.

   The example reminded me of how the textbooks use examples of such unintended consequences in a different way -- to make a rhetorical point of their own in favour of 'free market' policies. Is something like the following familiar? The apparently short-sighted or economically ignorant, policymaker who thought that rent controls were a good idea, but did not realize that it would make it harder to find an apartment as excess demand developed. Or the well-intentioned raising of minimum wages by politicians, not realizing that an excess supply of labour would develop -- at least according to the perfectly competitive model. Or the claim that requiring people to buckle up and use their seatbelts will have a more-than offsetting effect of inducing them to drive more carelessly, leading to an increase in accidents and injury and death. (OK, no text I know of is crazy enough to try that one out, but I could not make it up; it's in the professional literature. See Sam Peltzman, “The Effects of Automobile Safety Regulation,” Journal of Political Economy 83 (1975), 667–725. For evidence that it's not true, see studies such as Anindya Sen, “An Empirical Test of the Offset Hypothesis,” Journal of Law and Economics 44:2 (2001), 481–510, or Alma Cohen and Liran Einav, "The effects of mandatory seatbelt laws on driving behavior and traffic fatalities", The Review of Economics and Statistics, November 2003, 85(4): 828–843.)
   These are cases of what the great economist Albert Hirschman, in his 1991 book The Rhetoric of Reaction: Perversity, Futility, Jeopardy, called 'The Perversity Thesis'. One form that conservative or reactionary arguments take is to say, in effect, 'Yes, policy X is undoubtedly well-intentioned, but don't you realize that it will have perverse effects leading, in fact, to undesirable outcomes?'
   Hirschman comments (pp.39-40):
For example, those who emphasize the perverse incentives  contained in unemployment benefits or welfare payments never mention that large areas of social assistance are fairly impervious to the 'supply response' that is at the bottom of whatever perverse effect may be at work: people are unlikely to gouge out their eyes in order to qualify for the corresponding social security or tax benefits.When industrial accident insurance was first introduced into the major industrial countries of Europe toward the end of the nineteenth century, there were many claims on the part of employers and various 'experts', that workers were mutilating themselves on purpose, but in due course these reports were found to be highly exaggerated. 
    Do some textbooks really offer examples of a 'perversity thesis'? You can see if you can find some examples yourself, but here's a quote from Baumol and Blinder's Microeconomics: Principles and Policy, 10th Ed. (2006) which I found with no effort:
Any government that sets out to repair what it sees as a defect in the market mechanism runs the risk of causing even more serious damage elsewhere. As a prominent economist once quipped, societies that are too willing to interfere with the operation of free markets soon find that the invisible hand is nowhere to be seen.

Thursday, September 23, 2010

Keeping economists in line

When we were kicking around possible titles for The Economics Anti-Textbook and I suggested that title to a friend of mine who teaches in what might be called a high-powered place, he warned me that someone (particularly someone without tenure) "would get in trouble" there if the powers-that-be found out he/she had used a book with that title in class. Fear of such trouble can keep any potentially dissident faculty members in line.
    I've never faced such problems myself, working in a small provincial university in a quiet backwater of the country where the local plutocrats reign almost unchallenged. No one cares very much about what I say in the classroom or what I write.
   But ideological control in the large institutions that matter, particularly the ones that train graduate students, is much stricter. I'm reminded of Noam Chomsky's explanation of why ideological control is much more severe in the big centres -- New York, Washington, Los Angeles, and so on -- than it is in small towns, where things can appear in the local paper that would never be allowed in the Washington Post or the New York Times. What's printed in The Topeka Capital-Journal in Topeka, Kansas, just doesn't matter a whole lot.
   What's happened at Notre Dame University in the US in the last few years is an unfortunate example of how non-orthodox views get sidelined and eliminated. For those who don't know the story, the economics department was spit up in 2004 (as described here) into the orthodox group and the non-orthodox. Last year, the university bosses slated the non-orthodox department for demolition, as described here in the Chronicle of Higher Education.

Tuesday, September 21, 2010

Increasing productivity and stagnant wages

I'm giving a course on economic inequality this term and that prompted me to read a paper, "Rising Profit Shares, Falling Wage Shares" by Ellen Russell and Mathieu Dufour published in 2007 by the Canadian Centre for Policy Alternatives as part of their 'Growing Gap' project. They document the stagnation of average wages since around 1980 while output per worker, however you care to measure it, has continued to rise.
  As they write (p.7):
most economic models would predict that real wages rise as productivity rises. But it is evident that rising productivity is not generating a commensurate rise in real wages. A stagnation of workers’ real average wages despite their rising productivity is a powerful indictment of the promise that a growing economy — and increased productivity — will produce benefits widely shared by the majority of Canadian workers. It simply isn’t happening.
If average wages had kept up with average productivity increases since 1991, they calculate that by 2005, the average worker would be earning $200 more per week than was actually the case. (See their Chart 4.) Instead, the fruits of the increase in average productivity have taken the form of a growing share of corporate profits in total output.
  This disconnect between productivity and wages reminds me of the estimates by Dan Trefler (University of Toronto) of the effects of the Canada-U.S. Free Trade Agreement. There were notable improvements in productivity, but only small improvements in real wages. As he put it (p.885),
 These earnings and wage effects are large in a statistical sense, but small in an economic sense. For example, a 3-percent rise in earnings spread over eight years will buy you more than a cup of coffee, but not at Starbucks.
     What do the texts have to say about productivity and wages? You can check your own favourite text (if 'favourite' is the word I'm looking for). But here is are a couple of sentences from the most recent edition of Chris Ragan and Richard Lipsey's Economics (12th Canadian Edition, p.484) which appear just after a review of the data on Canadian labour productivity from 1976-2008:
The higher productivity for today's workers explains why their real wages (the purchasing power of their earnings) are so much higher than for workers in the past. The close connection between productivity growth and rising material living standards explains the importance that is now placed on understanding the determinants of productivity growth.
Perhaps in the next edition, Chris Ragan will add a new figure comparing real GDP per worker or per hour worked (the data now shown in the text) and average real wages. But then that would entail rewriting the sentences I just quoted.

Market failures and political failures

This gloomy, but unfortunately very realistic, column by one of my favourite writers, George Monbiot, sets out the almost-completely failed state of climate change negotiations. As he puts it, Lord Stern's warning that climate change constitutes "the greatest market failure the world has seen" has been followed by the greatest political failure the world has seen.
  I'm looking forward to seeing how the textbooks handle this one. To admit the abject political failure would open the door to examining the power of big business -- what Monbiot calls "familiar political problems", although not ones that get any attention in the texts -- and also "deep rooted human weakness" in dealing with problems involving the long-term future.

Wednesday, September 15, 2010

Lucas on "The Industrial Revolution: Past and Future"

The essay on caring about inequality by Branko Milanovic (the topic of the previous post), quotes Robert Lucas as writing about how "to focus on questions of distribution" is "poisonous" and "harmful to sound economics". I had a look at Lucas's essay, "The Industrial Revolution: Past and Future", published on the website of the Minneapolis Fed. The quote Milanovic takes is from the last paragraph, where Lucas writes:
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
Of course, just because there has been very little redistribution of resources from the rich to the poor at the global level in the past (and plenty of examples of transfers going in the opposite direction - imperialism was and is not an exercise in philanthropy...), that does not mean that such transfers would be of little help now in speeding up the attainment of the objective that Lucas would like to see.
  Still, Lucas's essay is well worth reading. It struck me when I read it how such a simple and clear account of the key features of the economic history of the last 1,000 years (that he provides) belongs in every introductory economics textbook and yet can be found in almost none of them.

Milanovic on caring about inequality

Just a brief note to recommend an excellent essay by Branko Milanovic, "Why We All Care About Inequality (But Some of Us Are Loathe to Admit It), published in Challenge, Vol. 50, No. 6, November/December 2007, 109-120. (I find that every issue of Challenge, published by M.E. Sharpe, Ltd., has something stimulating in it.)
  Milanovic's article deserved to be cited in Ch. 9 of The Economics Anti-Textbook, where we criticize Martin Feldstein's misuse of the Pareto Principle when he makes the claim that we should not care if growth takes the form of increases in income for the rich and nothing for anyone else. Milanovic also finds Feldstein's claim totally unconvincing. He points out that it's an empirical fact that people care about other people's income, particularly the income of those who have more than they do, and that economists have to deal with that.
  It is pointless condemning this as envy, as Feldstein tries to do, and in any case, as Milanovic notes, the concern for what others have is also connected to judgments about fairness and justice and feelings of self-worth. (One can imagine Professor Feldstein's annoyance if all of his Harvard colleagues got a bonus added to their salaries and he got nothing.)
  Milanovic's makes some interesting comments about how he's found that many economists seem to be averse to research on inequality. Poverty, ok, but inequality, no. For example, "[i]t seems far better to focus on impoverishment than on inequality" writes Anne Krueger.
  Milanovic notes that when he started working on inequality, he was not popular because he lived in a communist country where inequality was not supposed to exist, although it did. Then when he lived in capitalist societies, he was no more popular: "rich people (and their supporters) similarly tended to object to the topic. They felt that any inequality that existed was right, since in their view every income was fine, just, and necessary, almost God-ordained -- market having taken over the role of God. Empirical studies were superfluous. The studies could merely sow trouble and discord and possibly lead to questioning of the existing social order."
 He then nicely shoots down the claims of those economists who claim that we should be concerned about poverty, but not about inequality. He writes: "To say that one cares about poverty means that his welfare function is affected by everything that happens below some arbitrary income level where the poor dwell, ..., while any income change above it (except if it affects his own income) leaves him indifferent." An implausible claim about actual welfare functions. Economists like Feldstein try to reinforce the argument with ethical claims that it's good to be concerned about the poor, but morally reprehensible to be concerned about other's incomes above the poverty line and certainly above one's own level of income.
  He suggests that economists who make these kinds of arguments are really trying to deflect attention away from inequality. "The concern with poverty is a price that the rich are willing to pay so that no one questions their incomes."

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?

Thursday, July 22, 2010

Adam Smith in the Economics Anti-Textbook

A reader of The Economics Anti-Textbook recently wrote to us and asked about our views of Adam Smith, whom we (he wrote) "cite ... extensively as advocating an absolutely free market capitalist economy". He asked in light of the comments made about Adam Smith's views by Noam Chomsky here and elsewhere. I thought a blog note might clarify things.
  The textbooks, with rare exceptions, provide little information about the development of economic ideas in general or about Adam Smith. Our references to Smith's 'invisible hand' theory [the claim that competitive markets frequently lead to an efficient allocation of resources] should be seen as references to the textbooks' use of the term. (Note: Robert Frank's Principles of Microeconomics -- I have the 3rd Canadian edition -- pp.200-201 offers a much more careful discussion of the 'invisible hand' idea than do other books.) 
  The caricature version of Smith put out by right-wing organizations -- that of an advocate of a free market capitalist economy -- does not square with the real Smith, who in his lifetime was regarded as something of a subversive who was an inspiration for the French Revolution. As Emma Rothschild explains in Ch. 2 of her Economic Sentiments: Adam Smith, Condorcet and the Enlightenment (Harvard U. Press, 2001), Smith the Conservative was an image make-over done after his death by writers in the 1790s.
  Rothschild writes (p.71): "Smith's real sentiments were obscured by Smith himself, and by his friends and followers after his death. But they amounted, during his lifetime, to a cluster of beliefs which were distinctly influenced by French ideas. He was critical of religious establishments, of war, of poverty, and of the privileges of the rich."
  She adds: "Freedom consisted, for Smith, in not being interfered with by others: in any side of one's life, and by any outside forces (churches, parish overseers, corporations, customs inspectors, national governments, masters, proprietors). Interference, or oppression, is itself an extraordinarily extensive notion; Smith at times talks of inequality as a form of oppression, and of low wages as a form of inequity. But it was just this multiplicity that was lost after his death. By the end of the 1790s, the freedom of noninterference had become something very much less, at least for political economy. It was little more now than the freedom not to be interfered with in one side of one's life (the economics), by one outside force (national government)."
  It's remarkable that this capitalist-libertarian caricature of Smith has survived unscathed for more than 200 years and is still being peddled by outfits like The Adam Smith Institute.
  Anyone interested in this topic might also look up Spencer Pack's book Capitalism as a moral system: Adam Smith's critique of the free market economy (Edward Elgar: 1991).

Friday, June 25, 2010

There is (supposedly) no 'exploitation' if people can choose

I recently received a copy of Economics for Life: 101 lessons you can use every day (3rd edition) by Bruce Madariaga. Many of the 'lessons' are perfectly reasonable, but one caught my eye. It was entitled "Sweat Shops Expoit Workers in Poor Countries". As every orthodox student of economics knows, this is nonsense as long as work is not forced. (Forced work and slavery is obviously exploitation and is not as rare as you  might think.)
  Prof. Madariaga explains (p.73) why 'sweat shop' labour is good: "... for many people living in less developed countries, even a very hard, very low-paying 'sweatshop' job is much better than no job at all... They choose to work long hours in unsafe conditions for very low pay, because the alternative (having no income) is worse."
  He adds: "It may seem humane to include, within trade agreements, labor rights standards that require all workers to be provided safe working conditions and minimum wages. But doing so would raise employers' costs of employing workers. Employers would respond by hiring fewer workers and possibly by going out of business. The elimination of work opportunities would end up hurting many of the people such labor rights requirements are intended to help."
  This is a nice example of what Albert Hirschman in his 1991 book The Rhetoric of Reaction calls 'the perversity thesis'. This is a reactionary argument against a progressive-looking policy in which it's claimed that the policy in fact would be perverse by hurting those it's intending to help. (It's a familiar argument made against minimum wages in general.)
  I was reminded of the appeal of this kind of argument recently when reading Paul Krugman's blog of 9 June in which he speculated on the strange appeal of promoting government spending cuts when unemployment is so high: "What I think is happening is that we’re seeing the deep seductiveness, for many economists (and others), of taking what sounds like a tough-minded position in favor of inflicting pain on the economy — and the people who make up that economy." He quotes from Keynes in The General Theory: "That it [classical economics, in this case] reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue."
  So what's wrong with the standard argument that Prof. Madariaga puts forward? 
  Here's an extract from a fine book by Daniel M. Hausman and Michael S. McPherson, Economics Analysis, Moral Philosophy, and Public Policy (Cambridge Univ. Press, 2006):
  "Consider an agreement between a billionaire and a beggar whereby the beggar agrees to work 16-hour days in exchange for gruel and a straw mattress. Both parties may be rational and well-informed and may enter the agreement 'voluntarily'. (As we will see ... in the next chapter, to maintain that any exchange not involving physical force is voluntary is to make a controversial moral claim.) But the billionaire nevertheless is exploiting the beggar. No matter that the beggar may agree without reservations, the arrangement seems to most people unjust."
  The textbook approach dismisses this and indeed insists that any exchange not involving physical force is indeed voluntary and gives its blessing to the outcome. What this obviously misses is that other, more ethically acceptable, outcomes were possible, but did not happen -- in  this case because of the disparity in bargaining power between the two parties.
  A recent report by the Australian Broadcasting Corporation ('Horrendous' sweatshops ditched for Australian made') states: "Work conditions in China have come under fire in the past month, after about a dozen workers committed suicide at an electronics factory in Shenzen." Using the textbook logic, these suicides were also voluntary acts, making the (now former) workers even better off than when they were employed, when they were, in turn, even better off than they would have been without those jobs, so none of this poses any ethical problems.
  As we also note in The Economics Anti-Textbook (p.233), "consumers may care about how the products they buy were produced", a point uniformly ignored in the textbooks. Someone who gets paid 10 cents to sew a $50 shirt could have their income raised by a factor of 5 if consumers were willing to pay an extra 40 cents for the shirt accompanied by a guarantee that the extra money would indeed go to that worker. Kimberly Ann Elliott and Richard Freeman have an interesting essay on this topic with evidence about how much more consumers might be willing to pay for such credible information.

Tuesday, June 8, 2010

Is There a Market Fundamentalist Message in Principles Textbooks?

At the Canadian Economics Association Meetings in Quebec City at the end of May, Tony Myatt and I participated in a panel session we'd organized with textbook authors around the title of this post. From The Economics Anti-Textbook perspective, the answer to the question of whether there's a 'market fundamentalist' message is 'yes'.
  However, as we argue in the Anti-Textbook, the texts are not crude 'free market', laissez-faire tracts, and our critique is not a personal attack on their authors. What's going on is far more subtle.
  While we don't discuss this explicitly in any detail in the Anti-Textbook, I think a case can be made that the economics texts fit into the propaganda system more generally. For me, Edward Herman and Noam Chomsky's Manufacturing Consent provides a good way of thinking about that system. It's 'free market' propaganda, the result of the uncoordinated and decentralized decisions of a large number of people, all pursuing their self-interest. (Here, 'propaganda' just means the systematic propagation of a particular point of view.)
  In thinking about the products of that system, Herman and Chomsky point out that you have to think about two things. One is what is not said -- the ideas that are off-limits, like economic democracy in this case. That's not always easy to do. To paraphrase one writer about the media: the textbooks can't tell you what to think, but they can tell you what to think about.
 The second thing is to examine what's said. In the preface to their book, Herman and Chomsky write: “... even more important [than the things that are not said] ... is the question of the attention given to a fact – its placement, tone, and repetitions, the framework of analysis within which it is presented, and the related facts that accompany it and give it meaning...” (my emphasis)
  So where does 'market fundamentalism' come in here? George Soros, who originated the term explained that "It holds that the allocation of resources is best left to the market mechanism, and any interference with that mechanism reduces the efficiency of the economy." (On Globalization, p.4)
  Briefly, we argued that the textbooks do give this impression by spending roughly the first half of the book presenting a story of 'perfect markets', where indeed all 'interference' with the market does produce inefficiencies. Smith's 'invisible hand' metaphor is used to describe the market economy. Then, later in the book, students are supposed to unlearn this when, one by one, the sources of 'market failure' are revealed in more detail. But the impression of the efficient market economy has already been instilled. Market failures can appear more as exceptions to the general efficiency of most markets rather than the rule itself. But, as Joseph Stiglitz writes in his recent book Freefall, 'The invisible hand is invisible because it is not there.'


Wednesday, May 12, 2010

"Economic enlightenment" and the supposed consequences of free trade

I recently had a look at the new edition of Econ Journal Watch, an e-journal devoted in large part to comment on what's in the economics journals. The May 2010 issue contains a laughable article entitled "Economic Enlightenment in Relation to College-going, Ideology and Other Variables: a Zogby Survey of Americans", by Zelijka Buturovic, a psychologist, and the journal's editor, Daniel B. Klein, a professor of economics and George Mason University in Fairfax, Virginia.
  The survey attempts to get at the interesting question of whether the college-educated have better knowledge of economics ("economic enlightenment") than those with lesser levels of education, and whether 'economic enlightenment' is related to other things, like political ideology.
  "Economic enlightenment" is judged by the answers to 8 questions, but (to keep this short) I'll focus on just one: "Free trade leads to unemployment". Anyone who answers "strongly agree" or "somewhat agree" is branded by the authors as "economically unenlightened". (Not surprisingly, those further left on the political spectrum are deemed the most ignorant.)
  Remarkably, and perhaps instructively, the authors don't regard it as necessary to explain why free trade does not lead to unemployment. Apparently the answer is supposed to be so blindingly obvious to the professional readership of the journal and so beyond doubt that not a single phrase is needed to defend the 'right' answer.
  Chapter 10 in The Economics Anti-Textbook deals with trade issues, so I won't repeat what's there. Suffice it to say, as one of my international trade teachers, Jim Melvin (then at the University of Western Ontario) memorably put it in a lecture: unemployment is the whole point of free trade. As he then explained, the point of free trade is to improve the allocation of resources in the economy and that resource reallocation can't take place unless some the resources themselves (the labour and capital of the textbooks) move to other uses. That movement necessarily involves some period of unemployment. No pain, no gain. If you make the judgement as a policymaker that the gain is worth the pain, then free trade is your policy.
  So how, then, can the authors of this article claim that free trade does not lead to unemployment? I can only guess, because they give no clue. My guess is that they are saying that free trade does not permanently increase unemployment. The unemployment is temporary: some get re-employed, some leave the labour force and are no longer counted as unemployed. The economy returns to full employment. If unemployment is being dismissed as of no importance, that return to full employment is presumably quick. In the perfectly competitive, perfect- information perfect-mobility labour markets of the introductory micro textbooks, unemployment is always zero.
  In short, free trade does not lead to unemployment because nothing leads to unemployment; the economy is simply assumed always to return to full employment in a negligible period of time. Students have to wait until they get to macroeconomics to read about the issue of 'structural unemployment' -- the longer-term unemployment experienced by workers displaced by things like shifts in demand for skills and products that can result from things like ... changes in trade patterns. (In the United States, special 'adjustment assistance' programs have been experimented with in an attempt to deal specifically with the unemployment caused by trade liberalization.)
  What's most scary about Buturovic and Klein's article is not the manifest silliness of some of their claims, but the fact that it's clearly been read by many intelligent and well-educated colleagues and reviewers who apparently see nothing wrong with it.


Postscript (added 28 August): On looking at the Econ J. Watch article again, I realized that my comment was a bit off-base. In fact, the authors do have one sentence about how they interpret the statement 'free trade leads to unemployment' -- they want to interpret it as 'free trade leads, overall, to greater unemployment'. In other words, it's a claim that overall there is a net inflow into the pool of unemployed people in some unspecified period of time after the change in trade policy. Workers lose their jobs in import-competing industries, while jobs are gained in exporting sectors. I don't find that (or the rest of their article) convincing either, as I explain in a brief comment published in Econ Journal Watch in September.

Thursday, April 22, 2010

Earth Day 2010

Textbooks love to make the point that the optimal amount of pollution is positive, as if anyone ever suggested otherwise. The ways to address pollution externalities are then set out, and students have to try to figure out for themselves whether the actual amount of pollution in the world actually is optimal.
  An effective way for a lecturer to make the case that it's not is to show them the pollution that we'd like to forget about and to point out its long-term consequences. A nice example is the plastic garbage in the oceans. I was reminded of this recently while watching the short file, "Plastic Bag" by Ramin Bahrani, in which Werner Herzog provides the voice of the immortal plastic bag that yearns to find its way to an ocean vortex of plastic junk.
  That led me to look for a good report on the infamous North Pacific vortex. Here is a nice one from entitled Toxic: Garbage Island. When I do another introductory economics course this fall, I'm going to show this to my students.

Monday, April 5, 2010

Stiglitz on "Reforming Economics"

In his new book, Freefall: America, Free Markets, and the Sinking of the World Economy, Joseph Stiglitz of Columbia University has some things to say about economics and the economics profession at the end of the book. I suppose it's no coincidence that many of the points he makes echo what we have to say in The Economics Anti-Textbook; we make numerous references to Stiglitz's work. After all, one of our central points is that the textbooks fail to reflect what economists know -- or should know -- about economic theory.
   Stiglitz writes of recent decades: "Economics had moved -- more than economists would like to think -- from being a scientific discipline into becoming free market capitalism's biggest cheerleader." (p.238). (I could quibble about it being a "scientific discipline" in the good old days, but let that pass.)
   He makes it clear that many economists start with a particular view of the world and choose a theoretical model that reflects it and ignore inconvenient theoretical results, notably those written by Stiglitz and his colleagues. In a series of papers in the 1970s and 1980s, Stiglitz and his collaborators showed that even small deviations from the restrictive assumptions of the competitive model (eg. perfect information) had big effects. Yet the belief persisted among many devotees of the 'free market' that the market economy was 'almost efficient'. As Stiglitz writes: "It was a theological position, and it soon became clear that no piece of evidence or theoretical research would budge them from it." (p.244) The case we make in The Economics Anti-Textbook is that this is, in fact, the view students are invited to accept by textbook authors.


Sunday, March 14, 2010

The textbooks on labour markets

The fine pieces (found here and here) by Felicity Lawrence in yesterday's Guardian on the horrors of work in British food factories reminded me of another scandal: the failure of the mainstream economics textbooks to offer a theoretical framework to explain what Ms Lawrence terms "a race to the bottom in terms of labour standards". The articles describe "physical and verbal abuse and degrading working conditions", endured "under threat of the sack", of people "being denied toilet breaks and forced to endure the humiliation of bleeding and urinating on themselves".
  In the fantasy world presented in the textbooks, perfect competition reigns supreme in labour markets. Employers are powerless, unable even to choose the wage they will offer workers; there is a 'market wage' that everyone must accept. Among other things, the theory also implies that workers can quit and immediately get a new job if a manager kicks them or throws things at them. The "threat of the sack" is no threat at all. "Exploitation" is a meaningless word.
  As we point out in The Economics Anti-Textbook, it's easy to come up with a simple theoretical model in which employers have 'market power' and in which the "threat of the sack" is a real threat. It requires a diagram with two lines crossing. Instead, every single mainstream textbook -- if it even considers a model where employers have some power over the wage -- paints it as a rarity, like an isolated mining town, where there's only one employer.
  This is no isolated failure to acknowledge power and injustice. That failure is systematic. However, one thing that we did not do in The Economics Anti-Textbook was to try to explain why most of the textbooks are like this. Perhaps that's something we should tackle here in this blog.

Wednesday, March 10, 2010

"Prosperity Without Growth: Economics for a Finite Planet"

Questions about economic growth are typically left to macroeconomics, so we don't deal much with them in The Economics Anti-Textbook; it's focused on microeconomics. We do point to the evidence (in Chapter 4) about the apparent lack of any significant relationship between growth in per-person incomes and measures of well-being such as happiness and satisfaction with life. We also note the negative effects that conventional economic growth has in terms of its effects on climate change in particular. However, a proper discussion of the question of whether long-term economic growth is compatible with the finite nature of many of the resources we need for that growth was beyond the scope of our book.
   In the most recent Guardian Weekly, I read a review of a new book, Prosperity Without Growth: Economics for a Finite Planet, by Tim Jackson, that tackles some big questions and seems well worth a look. The review is also available on The Guardian's main site:


Thursday, March 4, 2010

Textbook nonsense about "Fair Trade"

One of the purposes of this Economics Anti-Textbook blog is to examine some of the bad features of current economics textbooks by looking at specific examples. Recently, a dismayed colleague pointed out to me the nonsense about Fair Trade products that is in the most recent Canadian edition of the widely-used McConnell & Brue text. (I don't have the American original, but I assume that the content is unchanged; the Canadian co-author, my former colleague, Tom Barbiero, likely had little leeway in altering such content.)
  As we note in The Economics Anti-Textbook, any discussion of Fair Trade products is rare indeed, but the way it's done here is very instructive. The general argument is that those who buy Fair Trade products have their hearts in the right place, but that what they're doing is futile and may even be counter-productive. The approach fits perfectly the rhetorical devices used in conservative attacks on progressive policies, as identified by the distinguished economist Albert O. Hirschman in his 1991 book The Rhetoric of Reaction.
  Let's see how they do it.
  First, McConnell and Brue (M&B) write: "Because workers in many low-income countries are highly immobile, have few employment options, and are not unionized, the large dominant sellers can supposedly keep an undeservedly large portion of the proceeds from added exports for themselves ... while simultaneously denying a fair share to their workers (by keeping wages low). To counter this purported problem ..." and later "the purported benefits of fair trade..." (my italics). The use of 'supposedly' and 'purported' makes it clear that they don't believe fair trade has any real merit. Note that if the situation they describe is accurate, economic theory would predict that employers (or buyers, more generally) would have a lot of monopsony power, a topic they discuss elsewhere in the book. So what's wrong? Are workers really mobile? Are there really not large dominant buyers of coffee beans? They don't say.
  Second, M&B make claims about what the professional consensus is about Fair Trade. They write: "most economists question the overall effectiveness of the fair-trade approach..." and "the consensus among economists is that fair-trade purchasing ... simply shifts demand within low-wage countries (or among them). It does not increase the average pay of the workers within a particular low-wage nation." "Some economists say that other action ... might benefit the low-income nations more effectively than fair-trade purchasing."
  There is not a single reference anywhere to the professional literature -- the vast body of writing in academic journals and books by which economists communicate with each other. Their claims about "most economists" or "the consensus among economists" is entirely unsupported. The line "some economists say" is a classic way for the authors to voice their own opinions. (This sad display -- which would get an 'F' in an undergraduate essay -- is actually typical of how the texts ignore the literature which they are supposed to be reflecting. Compare with any introductory psychology text, for example.)
  Third, and worst of all, is M&B's misleading description of what Fair Trade is about. (For the facts, see the website of Fairtrade Labelling Organizations International: People may care not only about the physical characteristics of the products they buy, but also about how the product was produced. As a glance at Fair Trade standards confirms, it's about promoting economic democracy by buying from producer co-operatives and about promoting the rights of hired labour by ensuring that the goods are produced by workers who have "access to collective bargaining processes and freedom of association of the workforce, condition of employment exceeding legal minimum requirements, adequate occupational safety and health conditions and sufficient facilities for the workforce to manage the Fairtrade Premium."
  By providing people with believable information about how the product was produced, the Fair Trade labelling organizations are improving the efficiency of markets. Why? Because with that believable information, a consumer could now buy a product which she would not have otherwise had the opportunity of buying. To use the language of the texts: a mutually-advantageous trade can now take place that would otherwise not have taken place. I get a bag of coffee beans produced in a way that I approve of and for which I am willing to pay a premium; the producers get a better and more stable price.
  Yet M& B write (attributing the following nonsense to "some economists"): "price and wage setting by advocacy groups is based on highly subjective views of fairness that may be at odd with economic realities. Distortions of market prices and wages invite inefficiency and unintended consequences. (Recall our discussion of government price floors in Chapter 3.)" This, to be polite, is drivel.

Wednesday, March 3, 2010

Self-defence against the textbooks

One reason that we wrote The Economics Anti-Textbook was to help instructors deal with the bad features of the typical microeconomics textbook: the questions that are not asked, the attitudes that are insinuated, the hidden value judgements that lurk between the lines. As Tony's last post pointed out, the textbooks provide lots of room for a lecturer who is so inclined to comment critically about their content. The Economics Anti-Textbook provides some textual support to increase the credibility of the critique.
One of the main motives for me in working on this book was to write something to help students defend themselves against the formidable persuasive apparatus deployed against them. I should know; I fell for it myself when I was a student.