Posts Tagged ‘economics’


Mike the Mad Biologist [ht: sm] casts doubt on the idea of scarcity. And for good reason:

While they seem to have receded somewhat, a couple of years ago, there were quite a few arguments about the fundamentals of economics (especially macroeconomics) and how to teach them. As an outsider, one thing that struck me as odd was the emphasis on scarcity (e.g., economics is called the science of scarcity). It’s odd because, at least in wealthy societies, there are very few scarce items. We’re definitely not slacking in our ability to produce calories, which arguably for most of human, if not hominin, history was the vital concern.

Mainstream economists, as I teach my students, start with the idea of scarcity—the combination of limited means and unlimited desires. And then, after a great deal of math and a wealth of assumptions, they prove that a system of private property and free markets provides a perfect balance between those limited means and unlimited desires.

But, as I also teach them, the mainstream presumption is that scarcity is universal—both transcultural and transhistorical. In other words, they start with the idea that all human beings, in all times and places, have had to confront and solve the problem of scarcity.

An alternative is to see scarcity as an institutional, historical and social, phenomenon. In particular places, at particular times, the existing set of economic and social institutions makes certain goods and services scarce. Thus, for example, oil is scarce because of the particular configuration of the energy industry, the personal car and truck culture, the government-sponsored expansion of the highway system, and so on. That’s what makes oil scarce. Similar stories can be told about the scarcity of water, arable land, good public transportation, high-quality mass education, and so on. Their scarcity is the product of particular sets of institutions in particular societies.

Why is that important? Because, as against the assumption of mainstream economists that scarcity is always with us (and therefore can’t be changed), the idea that scarcity is an institutional phenomenon means that changing economic and social institutions can change or eliminate scarcities.

The same applies, of course, to abundances. Right now, we’re living in a society that has created a surplus of labor (and, as a result, stagnant wages), which is part and parcel of capitalism’s law of population. If we get rid of capitalist institutions, then we can create a new law of population, one in which the labor workers perform and the value they create are not turned against them.


One of the most studied issues in contemporary economics is the effect of an increase in the minimum wage. But here we have a panel of so-called experts composed of mainstream economists who are uncertain—about whether employment will decrease or output will increase.

Ordinarily, I would applaud a health dose of uncertainty among economists, especially mainstream economists.


But, of course, mainstream economists show themselves to be quite certain about things other than the minimum wage, such as the idea that the median American household, notwithstanding the small increase in household income, is actually much better off.

Just sayin’. . .


Richard Maxwell and Toby Miller recently made the case for solidarity-based consumerism in response to Apple’s business model:

Faced with a global political economy that condones such a business model, proponents of solidarity between electronics workers and digital consumers(link is external) have big ambitions. They aim to eliminate the estrangement between worker and consumer, awaken consciousness of the political and economic ties that bind them, and install resolute ethical commitments to building a new kind of bond based in mutuality, justice, and equality that stretches across the global supply chain of electronic goods.

As consumers, we should support a solidarity-based consumerism. The alternative is the status quo where profits are beat out of the lives of electronics workers while consumers pay a premium to keep the mark-ups feeding those profits. To the egoistic consumer, we say it’s time to stop blaming higher wages for higher prices. Instead, ask Apple, the most valuable company in the world, to lower its prices and pay good wages directly to factory workers who make their i-Things. Trust us, they won’t go broke.

They base their argument on an analysis of the financial relationships between Electronic Manufacturing Services (providers such as Flextronics, Foxconn, and Jabil) and the Brand Names (like Apple) of consumer electronics by industry veteran Anthony Harris (pdf).

Harris’s example clearly shows how the wages of workers who actually produce smart phones and other electronic gadgets are a small (he estimates them to be 2 percent) of the final price of those commodities.

All along the product supply chain – from the component supplier to the assembly factory to the retail outlet – prices are factored up by percentage of goods value. The factory price is marked-up on basis of invoice value without differentiating between cost of labour, manufacturing complexity, materials, IP, or other value. The EMS selling price gets a margin added every time it is moving down the chain. For example, a smartphone with a factory price of 100 Euro of which 2 Euro = labour costs. Next in line exports to USA/Europe and adds 30% (logistics, management, margin) = 130 Euro. Distributor in USA adds another 30% for logistics, risk and labour = 169 Euro. The store adds its percentage and then there is the internet provider contract and Vat, all pushing upwards to 500 Euro. With this standard business model mark-up on the EMS selling price the actual labour cost becomes almost insignificant as an element of the retail store price.

He also explains the high cost to workers of “flexibility” at the bottom of the chain:

To illustrate what happens: When Apple launched the initial manufacturing of the iPhone, a screen change was suddenly required. 8,000 workers were woken from their dormitories in the middle of the night in China. Within 30 minutes, after being given tea and biscuits, they began an unscheduled 12-hour shift to kick-start the change for the new screens. Foxconn relentlessly ramped up production to 10,000 pieces (a day) after only four days. One Apple executive, as quoted in The New York Times, said “That speed and flexibility is breath taking. There’s no American plant that can match that.”

Breath taking speed and flexibility, however, come at a human price, which clearly American workers at that time were not prepared to endure. Yet with a cup of tea and a biscuit, impoverished Chinese workers were all too ready to earn some extra money to help cover basic costs and feed their families.

I am interested in Harris’s analysis because, in class the other day, the students wanted to know if the iPhone represented an example of a utility theory of value or a labor theory of value. (We were discussing the different assumptions and consequences of those two theories of value.) And, when I answered that both theories could be used to make sense of the price of an iPhone but the two theories were incompatible, they wanted to know if it was possible to combine them (rather than choose between them).

Let me pose a bit of a different question: which of the two theories is more compatible with the kind of solidarity-based consumerism Maxwell and Miller are advocating?

According to the utility (or neoclassical) theory of value, the final price of an iPhone represents a balance between supply and demand and, as such, reflects the preferences, technology, and resource endowments of the societies at each stage of the supply chain. In particular, the workers in the Electronic Manufacturing Services, who receive low wages and agree to flexible rules, are being paid according to their productivity and desire to work. No more, no less. Therefore, consumers can remain content to purchase their iPhones at the going price and, if by chance they become aware of what’s going at the bottom, let “the market” work things out. No need to worry.

According to a labor theory of value (in particular, a Marxian labor theory of value), the final price of an iPhone represents something else: it’s a combination of the materials and equipment purchased to produce and transport iPhones, the wages paid to workers at various stages of the supply chain, and a surplus created by those workers. That surplus is in turn used for various purposes: taxes to governments, salaries of executives, dividends to shareholders, and, perhaps most important, an extensive advertising campaign to make sure millions of people continue to want to purchase more iPhones. And the less workers are paid on the bottom and at each stage of the supply chain, and the more “flexible” are their work rules, the more surplus Apple is able to appropriate and the higher price at which they can sell their smart phones.

Clearly, a labor theory of value is more compatible with Maxwell and Miller’s solidarity-based consumerism. It makes people aware of the work and value-creation that are taking place at each stage of the supply chain—from the initial research and development through the production of the phones to their transportation to wherever they are sold—and the amount of surplus Apple is able to capture for its own purposes.

In the end, those are the high costs that serve as the basis of the high price of our iPhones.


Harmen de Hoop and Jan Ubøe, “Permanent Education (a mural about the beauty of knowledge)” (Nuart 2015, Stavanger, Norway)

Ubøe, Professor of Mathematics and Statistics at the Norwegian School Of Economics, gives a 30-minute lecture on the streets of Stavanger on the subject of option pricing.

Drawing on Black and Scholes explanation of how to price options, Ubøe will explain how banks can eliminate risk when they issue options. Black and Scholes explained how banks (by trading continuously in the market) can meet their obligations no matter what happens. The option price is the minimum amount of money that a bank needs to carry out such a strategy.

While the core argument is perfectly sound, it has an interesting flaw. If the market suddenly makes a jump, i.e. reacts so fast that the bank does not have sufficient time to reposition their assets, the bank will be exposed to risk. This flaw goes a long way to explain the devastating financial crisis.

This theory, and similar other theories, led banks to believe that risk no longer existed, so why not lend money to whoever is in need of money? In the end the losses peaked at 13,000 billion dollars – more than the total profits from banking since the dawn of time.

My guess is, most of the members of the audience did not understand the mathematics. However, Ubøe assures them it works—both as a form of knowledge (the manipulation of the mathematics) and as a strategy for banks (to eliminate risk)—and they can’t but believe him. It has a kind of beauty.

And then he explains that other effect of the math: it led banks to believe they had found a way of eliminating risk (because, like the audience, they believed the mathematicians), which fell apart when markets made sudden jumps and the traders weren’t able to reposition their assets quickly enough.

In that case, the beauty of the knowledge is undermined by the ugliness of the results.


Special mention

huck1aug skitso



In the end, it all comes down to the theory of value.

That’s what’s at stake in the ongoing debate about the growing gap between productivity and wages in the U.S. economy. Robert Lawrence tries to define it away (by redefining both output and compensation so that the growth rates coincide). Robert Solow, on the other hand, takes the gap seriously and then looks to rent as the key explanatory factor.

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

This is a tricky matter because there is no direct measurement of rent in this sense. You will not find a line called “monopoly rent” in any firm’s income statement or in the national accounts. It has to be estimated indirectly, if at all. There have been attempts to do this, by one ingenious method or another. The results are not quite “all over the place” but they differ. It is enough if the rent component lies between, say, 10 and 30 percent of GDP, where most of the estimates fall. This is what has to be divided between the claimants—labor and capital and perhaps others. It is essential to understand that what we measure as wages and profits both contain an element of rent.

Until recently, when discussing the distribution of income, mainstream economists’ focus was on profit and wages. Now, however, I’m noticing more and more references to rent.

What’s going on? My sense is, mainstream economists, both liberal and conservative, were content with the idea of “just deserts”—the idea that different “factors of production” were paid what they were “worth” according to marginal productivity theory. And, for the most part, that meant labor and capital, and thus wages and profits. The presumption was that labor was able to capture its “just” share of productivity growth, and labor and capital shares were assumed to be pretty stable (as long as both shares grew at the same rate). Moreover, the idea of rent, which had figured prominently in the theories of the classical economists (like Smith and Ricardo), had mostly dropped out of the equation, given the declining significance of agriculture in the United States and their lack of interest in other forms of land rent (such as the private ownership of land, including the resources under the surface, and buildings).

Well, all that broke down in the wake of the crash of 2007-08. Of course, marginal productivity theory was always on shaky ground. And the gap between wages and productivity had been growing since the mid-1970s. But it was only with the popular reaction to the problem of the “1 percent” and, then, during the unequal recovery, when the tendency for the gap between a tiny minority at the top and everyone else to increase was quickly restored (after a brief hiatus in 2009), that some mainstream economists took notice of the cracks in their theoretical edifice. It became increasingly difficult for them (or at least some of them) to continue to invoke the “just deserts” of marginal productivity theory.

The problem, of course, is mainstream economists still needed a theory of income distribution grounded in a theory of value, and rejecting marginal productivity theory would mean adopting another approach. And the main contender is Marx’s theory, the theory of class exploitation. According to the Marxian theory of value, workers create a surplus that is appropriated not by them but by a small group of capitalists even when productivity and wages were growing at the same rate (such as during the 1948-1973 period). And workers were even more exploited when productivity continued to grow but wages were stagnant (from 1973 onward).

That’s one theory of the growing gap between productivity and wages. But if mainstream economists were not going to follow that path, they needed an alternative. That’s where rent enters the story. It’s something “extra,” something can’t be attributed to either capital or labor, a flow of value that is associated more with an “owning” than a “doing” (because the mainstream assumption is that both capital and labor “do” something, for which they receive their appropriate or just compensation).

According to Solow, capital and labor battle over receiving portions of that rent.

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.

The problem, as I see it, is that Solow, like all other mainstream economists, is assuming that profits, wages, and rents are independent sources of income. The only difference between his view and that of the classicals is that Solow sees rents going not to an independent class of landlords, but as being “shared” by capital and labor—with labor sometimes getting a larger share and other times a smaller share, depending on the amount of power it is able to wield.

We’re back, then, to something akin to the Trinity Formula. And, as the Old Moor once wrote,

the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer’s fees, red beets and music.


I have to laugh when I read the back and forth about who sneered at whom in the battle over mainstream macroeconomics.

According to Paul Romer, Chicago’s rejection of MIT-style macroeconomics was a defensive reaction to the sarcasm of Robert Solow. Paul Krugman says no; Dornbusch, Fischer, and others at MIT tried to meet Chicago halfway but “Chicago responded with trash talk.”


First, is anyone surprised that economists at Chicago and MIT engaged in sarcasm toward each other’s work? That’s what mainstream economists do all the time. They’re dismissive of the work in other academic disciplines. They ridicule radical and heterodox approaches within economics. And, yes, they engage in trash talk about mainstream theories other than their own. All the time. For as long as I’ve been studying economics. And of course even earlier.

Second, we’re going to now explain the pendulum swings of mainstream macroeconomics, back and forth between more Keynesian versions and more neoclassical versions, according to who sneered at whom? There’s a bit more going on here, including developments inside the discipline and events in the world beyond the academy. The trajectory of mainstream macroeconomics both influenced and was influenced by everything else taking place inside and outside the academy (and I doubt trash-talking between schools of thought had a whole helluva lot to do with it).

Modern Economics


So, what did take place? Basically (and Greg Mankiw [pdf] is a pretty good guide here, at least once you set aside the silly language of scientists and engineers), mainstream macroeconomics (the blue and yellow bars in the chart above) was invented in the late-1940s/early-1950s as neoclassical economists (like Paul Samuelson and John Hicks) attempted to domesticate Keynesian economics and combine it with neoclassical economics, thus creating what came to be called the “neoclassical synthesis.” (In those days, the teaching of mainstream economics started with macroeconomics, thus reflecting the problems of capitalist instability that culminated in the first Great Depression, and then turned to the supply-and-demand framework of neoclassical microeconomics. These days, it’s the reverse: micro before macro.) Chicago, too, was part of the synthesis, to the extent that Milton Friedman and others spoke the same language, although of course they arrived at very different conclusions: while Paul Samuelson and Co. believed they’d solved the problem of instability, through active fiscal and monetary policies, Friedman and Co. preached the virtues of free markets and the problems created by government intervention. It was the visible hand of government intervention versus the invisible hand of laissez-faire.*

In the mid-1970s, a new approach emerged at Chicago—the so-called rational expectations revolution of Robert Lucas and Thomas Sargent—that is best described as neo-neoclassical macroeconomics. The idea was that, since on average economic agents had expectations that coincided with the “real” values in the economy (akin to the “correct” predictions of econometricians), including the outcomes of any and all economic policies, it was simply impossible to surprise rational people systematically. Therefore, government policy aimed at stabilizing the economy was doomed to failure.

The “new Chicago” economists then developed a whole series of macroeconomic models based on perfect information, rational expectations, and instantaneously market-clearing prices—whereby the only problems came from “exogenous shocks.” MIT (and Berkeley and other departments) responded by focusing on asymmetric information, “sticky” prices, and other market imperfections that might lead capitalist economies to less than full employment. It’s what we now call call “new Keynesian” economics.

Those are the limits of the current orthodoxy—the limits of the kinds of models that can be used and of the policies that should be adopted. They are the limits of the debate within mainstream economics.

And whatever sneering takes place between the two sides is, for those of us who practice a different kind of economics, merely a storm in a teacup.


*Here I’m referring only to mainstream macroeconomics. All the other approaches, from the Keynesian and Sraffian economics of Cambridge University through Modern Monetary Theory to Marxian economics, were then and continue to be simply sneered at and ridiculed by both MIT and Chicago.