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).
RH
Thursday, July 22, 2010
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.
RH
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.
RH
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)
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.'
RH
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.'
RH
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.
RH
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.
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.
RH
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 vbs.tv entitled Toxic: Garbage Island. When I do another introductory economics course this fall, I'm going to show this to my students.
RH
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 vbs.tv entitled Toxic: Garbage Island. When I do another introductory economics course this fall, I'm going to show this to my students.
RH
Subscribe to:
Posts (Atom)
