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."