Posts Tagged ‘neoclassical’

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Mark Tansey, “Triumph Over Mastery” (1986)

Reading the current debate about how we should approach the teaching of introductory economics, it’s clear the participants actually need to go back and take Epistemology 101.

Now, I’m the first to argue we need to change how we approach Econ 101 (as readers of this blog know). It’s a key course, because it’s the only economics course most college and university students will ever take: it’s where they’re introduced to the kinds of approaches and policies academic economists work with; it’s also a space to discuss the economic dimensions of individual and social life, both historically and in the contemporary world. Given the hundreds of thousands of students who every year are exposed to economics through such a course, its content is crucial.

The course, however, is also often badly taught. That’s in part because the material is many times presented in a mind-numbing manner, as a set of ideas and facts that need to be memorized in order to pass quizzes and exams. But, even more important, it’s because many of those ideas and facts—from the effects of minimum wages to the patterns of international trade—serve to naturalize both mainstream economic theory and the economic and social system celebrated by mainstream economists. In other words, students are generally taught that the limits of debate are defined by the parameters of mainstream economics.

I know, then, I should welcome a debate about what we should teach in Econ 101—but, as it turns out, not this one. Michael R. Strain wants to keep things pretty much as they are:

An economics 101 textbook is a treasure. The information therein captures the leaps forward in intellectual history, in our understanding of society — indeed, in our understanding of daily life. . .

Look. Understanding society and the economy is tough business. Economics 101 textbooks have a large responsibility to do that right and well. Does the theory of comparative advantage presented in 101 tell you most of what you need to know to understand the Trans-Pacific Partnership trade agreement? Nope. But that’s a ridiculous standard to hold for an intro class. Are economics 101 textbooks perfect? Of course not, and they can and should be improved. But existing 101 textbooks are one of the best tools society has to prepare young people for responsible and informed citizenship.

James Kwak, following Noah Smith, argues Econ 101 should be based on a combination of the mainstream theoretical models Strain wants to focus on (which, in Kwak’s view, provide “some incredibly useful analytical tools”) with empirical studies.

A friend and labor economist said to me that when thinking about the impact of a minimum wage, the natural starting point is the supply-and-demand diagram, because it’s so powerful—but you don’t stop there. The model is incomplete, like all models, and if you don’t realize that you will make mistakes.

Professional economists know all this, and hence many think that models need to be balanced by empirical research, even in first-year classes. Strain doesn’t buy this because “economists’ empirical studies don’t agree on many important policy issues.” I don’t understand this argument. The minimum wage may or may not increase unemployment, depending on a host of other factors. The fact that economists don’t agree reflects the messiness of the world. That’s a feature, not a bug.

Here’s the problem: both sides of the current debate (Strain as well as Kwak and Smith) treat theory and facts radically separate from one another. Thus, for them, there is one theory (separate from the facts) and one set of facts (separate from the theory).

This is where Epistemology 101 comes in. If the participants in the current debate took such a course, they’d learn that the idea of separate theories and facts forms the basis of only one theory of knowledge (which comes in two forms, rationalism and empiricism). But they’d also learn there’s an alternative theory of knowledge, according to which there are different theories and different sets of facts. Each theory has its own set of facts (and, of course, its own validity criterion). And, of course, these different theories and sets of facts interact and change over time.

From the perspective of the second theory of knowledge, then, the professors of Econ 101 would introduce students to different economic theories (neoclassical supply and demand, to be sure, but also other theories that serve as criticisms of and alternatives to neoclassical economics) and different sets of facts (including wages that are equal to the marginal productivity of labor as well as wages that are equal to the value of labor power, after which there is exploitation). And they would include the complex, discontinuous history of those theories and facts, including the debates amongst and between them.

Now, that would be an introductory economics course worthy of the name—and one that is consistent with Epistemology 101.

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We know that the so-called gig economy—in the form of such online platforms as Uber and Airbnb—offers more alternatives in terms of finding transportation and renting property. But it doesn’t overturn the unequalizing dynamics of contemporary capitalism. In fact, it probably makes things even more unequal.

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What about the online platforms for workers, like TaskRabbit and HourlyNerd? They, too, represent a new kind of freedom—and, at the same time, a new way for employers to take advantage of workers.

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A June 2015 report from the McKinsey Global Institute makes clear the advantages for employers: more output (by up to 9 percent), lower costs (by up to 7 percent), and higher profits (by up to 5.4 percent). The idea is that digital platforms enhance recruiting and personalize various aspects of talent management (including training, incentives, and career paths) in the case of high-skilled workers, and improve the screening and assessment of job candidates (thus allowing them to “make better predictions about candidates’ ability to perform tasks as well as the likelihood of their timeliness, reliability, and commitment”) for companies with large low-skilled workforces. It also makes it easier for employers to contract workers for particular projects and then let them go, until the next project (requiring a different group of workers) comes up. So, with better matching, screening, and flexibility, workers produce more, cost less, and create more profits for their employers.

It sounds like a dream come true for employers.* And it is!

The problem, of course, is to sell the new digital labor platforms to workers, both blue-collar and increasingly white-collar. Here’s how McKinsey does it:

Online talent platforms can bring a new dimension to profiles of individual workers: their soft skills, traits, and endorsements from colleagues and superiors. The accumulated ratings and feedback provided to contingent workers through online marketplaces could be valuable, particularly for young people with little other work experience as they seek permanent employment. Accumulating and codifying these reputational elements can help individuals distinguish themselves in the job market and can help employers identify people who are a better fit for the positions they are filling.

In other words, it’s all about freedom and control.

And that’s important to recognize, because capitalism does represent the birth of a new freedom—for example, compared to feudalism and slavery. Under feudalism, workers (serfs) were tied to their employers (lords) in order to gain access to land (and, if the serfs violated those ties, for instance by attempting to attach themselves to a different lord’s demense, there was always the blacklist). As for slavery, workers (slaves) were owned as human chattel by their employers (slaveowners) and could not work for anyone else unless they were rented or sold by their owners (and subject to torture if they didn’t work hard enough).

Capitalism, in contrast, means that workers own their ability to work and are free to sell it to any employer. But it also mean, because their ability to work isn’t worth anything to them unless they sell it to someone else for a wage or salary, workers are forced to have the freedom to sell their ability to work to another group, their employers. (And the employers, of course, appropriate the surplus those workers create—just as their predecessors did from their workers under feudalism and slavery.)

Nothing in the new digital platforms changes that. Workers are still forced to have the freedom to sell their ability to work (and to produce a surplus for someone else, or they won’t be hired). The only thing that’s changed is the amount of data and the kind of analytics that are available to their employers (concerning the positions employers are filling, the skills required, and the paths workers have followed in education or previous positions).

But workers beware: “As data collection and analysis become more sophisticated, users will have to be mindful that every online interaction can affect their professional reputation.” What’s new for workers is they’re now forced to have the freedom to also watch what they do online.

And that’s why workers—both on and off the job—are increasingly being turned into jack rabbits.

 

*It’s also the fulfillment of a dream for neoclassical economists, who in their models spend a great deal of time on issues of job search, screening, and matching—for them, when those issues are solved, the perfect labor market.

The problems surrounding the central institution of capitalism—the corporation—are so widespread and enormous they’ve even provoked concern in sympathetic quarters, such as the Harvard Business School.

This past November, Harvard hosted a conference during which participants attempted to grapple with the tensions between Milton Friedman’s theory of the firm—according to which firms can and should only benefit society by focusing on maximizing shareholder value—and the growing political influence of corporations after Citizens United—when it has become increasingly easy for firms to tweak the rules of the game in their favor.

Now, for the rest of us—citizens, nonmainstream economists, and academics in disciplines outside of business and economics—both the history of corporations and the prevailing neoclassical theory of the firm present so many problems it’s hard to believe Friedman’s ideas are still taken seriously. Long before Citizens United, corporations have exercised a great deal of influence both inside (over their workers) and outside (in politics and in the wider society). That’s why the corporation has been a contested institution—legally, economically, politically—since its inception. Similarly, the neoclassical theory of the firm (initially in its “black box” form, then when the owner-manager agency problem was raised) has swept most of the serious problems under the theoretical rug.*

But for the scholars gathered at Harvard, the key issue (as presented in the brief paper coauthored by Harvard Business School faculty members Paul Healy, Rebecca Henderson, David Moss, and Karthik Ramanna [pdf]) was a relatively narrow one:

if firms have the power to generate profits not only by producing socially beneficial goods and services, but also by tilting public policy and the “rules of the game” to their advantage (whether through aggressive lobbying, effective use of the revolving door between political and corporate appointments, or campaign contributions), then the core assumption that firms can maximize social value by maximizing shareholder value may not hold, and framing managerial responsibility as simply a matter of maximizing shareholder value may well be inappropriate.

Having read the paper, it is extraordinary that there’s no real history—no story about the invention of the corporation as a legal “person,” no Louis Brandeis or the Progressive movement, no Knights of Labor or United Mineworkers, no mention of the role of International Telephone & Telegraph in overthrowing Salvador Allende in Chile, no Massey Energy killing 29 miners in the Upper Big Branch mine. It’s as if the problem of corporate power only emerged after the 2010 Citizens United decision.

Still, from the perspective of neoclassical economics, even that problem looms large. According to the reigning paradigm (which guides much policy and is taught to hundreds of thousands of students every year), under conditions of perfect competition, free markets (including firms that maximize shareholder value) lead to Pareto-efficient outcomes. But if corporations (whether single firms or industries) can shape the institutions of the market (or the rules and ethical customs that help to maintain them), then all bets are off: “Maximizing shareholder value by deliberately distorting critical market institutions or regulations for private advantage seems unlikely to lead to the maximization of social value.”

That’s why the participants in the Harvard conference were caught between the real implications of Citizens United (that corporations can increasingly bend the social rules to their private advantage) and their continued adherence to the neoclassical theory of the firm (according to which maximizing shareholder value also maximizes social value).

I suppose it’s no surprise, then, which won out at the Harvard conference:

“I went into the conference with the understanding that one could question the premise of the Neoclassical paradigm in economics through logical arguments—e.g., the inconsistencies between Friedman’s assumptions and Stigler’s theory. I left with a sense that logical arguments on their own are unlikely to carry the day, because the Neoclassical paradigm is so powerfully ingrained into the discipline, into the fabric of modern economics,” says Ramanna.

 

*Including the problem neoclassical economists share with many of their heterodox counterparts, namely, what exactly does it mean that corporations maximize profits or shareholder value? First, how do we define profits or shareholder value, i.e., what is the appropriate metric, over what time horizon should it be defined, and how should it be measured? Second, corporations do many different things, such as exploit workers, give lavish pay to top managers, attempt to eliminate rivals, chart particular short-run and long-term growth path, buy favors and influence legislation, hoard cash, accumulate capital, and so on—why reduce all of what they do to a single dimension?

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Uncertainty, as we wrote years ago, is a real problem. Not a problem in and of itself. But it’s certainly a problem for modernist thinking.

That’s why, time and gain, neoclassical economists have attempted to reduce uncertainty to probabilistic certainty. It also seems to be why a team of scientists (neurobiologists and others) [ht: ja] have devised an experiment to show that we’re hardwired to experience stress under uncertainty.

So what’s the big deal? Everyone knows that uncertainty is stressful. But what’s not so obvious is that uncertainty is more stressful than predictable negative consequences. Is it really more stressful wondering whether you’ll make it to your meeting on time than knowing you’ll be late? Is it more stressful wondering if you’re about to get sacked than being relatively sure of it? De Berker’s results provide a resounding “yes”.

There are two problems with this approach. First, it ignores the possibility that uncertainty is a discursive phenomenon—that the stories we tell about uncertainty affect how we experience it. Second, uncertainty in and of itself need not be stressful. There are plenty of instances in which the outcome is simply unknown—from sitting down to write a paper to starting a new investment project, from starting a new relationship to participating in a political movement—when our uncertainty about what might happen is precisely what propels us forward.

Sure, turning over rocks that might have snakes hidden under them would probably induce stress. But that’s not because of the uncertainty; it’s because they’re snakes! (And, even then, I have herpetologist friends who would be delighted to find those snakes.)

Let’s just say I’m not convinced of the project to domesticate and control uncertainty, either by reducing it to a probabilistic calculus or to locate it in the brain (as part of some evolutionary process).

There’s lots of uncertainty out there but what it is and how we respond to it depend on the stories we tell (as I have written about many times on this blog). Uncertainty, in other words, is always and everywhere a discursive phenomenon.

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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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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.