Posts Tagged ‘markets’

Joseph Stiglitz usefully explains that there’s more than one theory of the distribution of income. One theory, he writes, focuses on competitive markets (according to which “factors of production” receive their marginal contributions to production, the “just deserts” of capitalism); the other, on power (“including the ability to exercise monopoly control or, in labor markets, to assert authority over workers”).

In the West in the post-World War II era, the liberal school of thought has dominated. Yet, as inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works. So, today, the second school of thought is ascendant.

I think Stiglitz is right: with the obscene levels of inequality we’ve seen emerge over the course of the past four decades, the notion of “just deserts” is being called into question, thereby creating space for other theories of the distribution of income to be recognized.

The only major problem with Stiglitz’s account is he leaves out a third possibility, an approach that combines a focus on markets with power, that is, a class analysis of the distribution of income (which the late Stephen Resnick begins to explain in the lecture above).

According to this class or Marxian theory of the distribution of income, markets are absolutely central to capitalism—on both the input side (e.g., when workers sell their labor power to capitalists) and the output side (when capitalists sell the finished goods to realize their value and capture profits). But so is power: workers are forced to have the freedom to sell their labor to capitalists because it has no use-value for them; and capitalists, who have access to the money to purchase the labor power, do so because they can productively consume it in order to appropriate the surplus-value the workers create.

That’s the first stage of the analysis, when markets and power combine to generate the surplus-value capitalists are able to realize in the form of profits. And that’s under the assumption that markets are competitive, that is, there is no monopoly power. It is literally a different reading of commodity values and profits, and therefore a critique of the idea that capitalist factors of production “get what they deserve.” They don’t, because of the existence of class exploitation.

But what if markets aren’t competitive? What if, for example, there is some kind of monopoly power? Well, it depends on what industry or sector we’re referring to. Let’s take one of the industries mentioned by Stiglitz: health insurance. In the case where employers are purchasing health insurance for their employees (the dominant model in the United States, at least for those with health insurance), those employers are forced to transfer some of the surplus-value they appropriate from their own employees to the insurance oligopolies. As a result, the rate of profit for the insurance companies rises (as their monopoly power increases) and the rate of profit for other employers falls (unless, of course, they can cut some other distribution of their surplus-value).*

The analysis could go on.** My only point is to point out there’s a third possibility in the debate over the distribution of income—a theory that combines markets and power and is focused on the role of class in making sense of the grotesque levels of inequality we’re seeing in the United States today.

And, of course, that third approach has policy implications very different from the others—not to force workers to increase their productivity in order to receive higher wages through the labor market or to hope that decreasing market concentration will make the distribution of income more equal, but instead to attack the problem at its source. That would mean changing both markets and power with the goal of eliminating class exploitation.

 

*This is one of the reasons capitalist employers might support “affordable” healthcare, to raise their rates of profit.

**The analysis of wage or consumer goods would be a bit different. But I don’t have the space to develop that here.

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There’s no doubt, after the crash of 2007-08, students—including those in middle schools—could use more economics education.

Unfortunately, they’re not getting it. They’re just being exposed to propaganda.

“What is the basic economic problem all societies face?” April Higgins asks her sixth-grade class.

Ava Watson, raises her hand: “Scarcity.”

The teacher asks for a definition and the class responds, in unison: “People have unlimited wants but limited resources.”

Not bad for a bunch of sixth-graders.

What April Higgins is engaged in is not economics education. It’s just neoclassical economics.

You see, there is no single “economic problem.” It all depends on which theory we’re looking at. According to neoclassical economists, all societies in all places and times have faced the same problem: scarcity. And, of course, private property and markets are their proposed solution.

But that’s not the economic problem as defined by Keynesians (how to analyze and use the visible hand of government to get out of less-than-full-employment equilibria) or Marxists (how is the surplus produced, appropriated, and distributed and how can exploitation be eliminated) or many other schools of thought.

The fact is, middle-school economics education (like high-school, undergraduate, and graduate economics education) is dominated by one school of thought, one approach among many, that is presented as “economics.” In the singular.

And that’s because it’s run by the Council for Economic Education and stipulated, in some instances, by government decree:

The Texas education code states that economics must be taught with an emphasis on the free market system and its benefits.

Economics education, at any level, means exposing students to and having them grapple with the assumptions and consequences of different economic theories and systems. Focusing only on one approach and system—neoclassical economic theory and capitalism—is just propaganda.

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Those of us in economics are confronted on a regular basis with the fantasy of perfect markets. It’s the idea, produced and presumed by neoclassical economists, that markets capture all the relevant costs and benefits of producing and exchanging commodities. Therefore, the conclusion is, if a market for something exists, it should be allowed to operate freely, and, if it doesn’t exist, it should be created. Then, when markets are allowed to flourish, the economy as a whole will reach a global optimum, what is often referred to as Pareto efficiency.

OK. Clearly, in the real world, that’s a silly proposition. And the idea of “market imperfections” is certainly catching on.

I’m thinking, for example, of Robert Shiller (who, along with George Akerlof, recently published Phishing for Phools: The Economics of Manipulation and Deception):

Don’t get us wrong: George and I are certainly free-market advocates. In fact, I have argued for years that we need more such markets, like futures markets for single-family home prices or occupational incomes, or markets that would enable us to trade claims on gross domestic product. I’ve written about these things in this column.

But, at the same time, we both believe that standard economic theory is typically overenthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.

And then there’s Robert Reich, who focuses on the upward redistributions going on every day, from the rest of us to the rich, that are hidden inside markets.

For example, Americans pay more for pharmaceuticals than do the citizens of any other developed nation.

That’s partly because it’s perfectly legal in the U.S. (but not in most other nations) for the makers of branded drugs to pay the makers of generic drugs to delay introducing cheaper unbranded equivalents, after patents on the brands have expired.

This costs you and me an estimated $3.5 billion a year – a hidden upward redistribution of our incomes to Pfizer, Merck, and other big proprietary drug companies, their executives, and major shareholders.

We also pay more for Internet service than do the inhabitants of any other developed nation.

The average cable bill in the United States rose 5 percent in 2012 (the latest year available), nearly triple the rate of inflation.

Why? Because 80 percent of us have no choice of Internet service provider, which allows them to charge us more.

Internet service here costs 3 and-a-half times more than it does in France, for example, where the typical customer can choose between 7 providers.

And U.S. cable companies are intent on keeping their monopoly.

And the list of such market imperfections could, of course, go on.

The problem, as I see it, is that these critics tend to focus on the sphere of markets and to forget about what is happening outside of markets, in the realm of production, where labor is performed and value is produced. The critics’ idea is that, if only we recognize the existence of widespread market imperfections, we can make the market system work better (and nudge people to achieve better outcomes). My concern is that, even if all markets work perfectly, a tiny group at the top who perform no labor still get to appropriate the surplus labor of those who do.

Accepting that our task is to make imperfect markets work better makes us all look like fools. In the end, it does nothing to eliminate that fundamental redistribution going on every day, “from the rest of us to the rich,” which is hidden outside the market.

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Harry G. Frankfurt (the author of, among other books, On Bullshit) attempts to argue that we aren’t, or at least shouldn’t be, concerned about inequality.

I suspect that people who profess to have this intuition are actually not responding to the inequality they perceive but to another feature of the situation they are observing. What I believe they find intuitively to be morally objectionable in circumstances of economic inequality is not that some of the individuals in those circumstances have less money than others. Rather, it is the fact that those with less have too little.

Branko Milanovic correctly reminds Frankfurt that all our needs are social needs. Thus, there’s no way of distinguishing between “authentic” and “inauthentic” needs and thus no way of being concerned about poverty without worry about inequality.

So, his reasoning brings him back to the beginning where he is unable to define needs as separate from the context where they are expressed. He is  unable to do so because he is unable to distinguish between the so-called “authentic” needs and those that we develop simply by living in a society from the very moment when we are born.We cannot define what the “good life” is independently of the others.

So, his whole edifice crumbles.

Indeed.

That’s one dimension of the problem: all our needs are social needs. (And as Jack Amariglio and I argued back in Postmodern Moments, the modernist Marxian argument that “planning can succeed where markets could not in discerning all of the needs underlying the plan and in calculating all of the effects of instituting it” is “unhelpful and ultimately damaging in distinguishing between capitalism and socialism.”)

But there’s another dimension of the problem: the existence of inequality is bad for everyone within society, the rich and middle class as well as the poor (the argument made by Kate Pickett and Richard Wilkinson), and it is literally a killing field (because, as Göran Therborn has argued, millions of people die premature deaths because of it).

Taken together—the idea that all needs are social needs and that inequality kills individuals and society as a whole—we really do need to be concerned about the grotesque (and rising) levels of inequality in the world today.

To argue otherwise is bullshit.

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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.”

Really?!

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).

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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.