Archive for October, 2010

When most people refer to labor economics as a subset of neoclassical economics, they are actually referring to econometrics applied (usually, but not always) to the labor market. I didn’t realize this when I signed up for Advanced Labor Economics my senior year in college. I enjoyed the class immensely, because it was well-taught and endowed me with some key econometric skills. However, I often wondered why labor economists took such a narrow approach to their trade. Via Mark Thoma, I see that the Steven Greenhouse of the New York Times has a post about a new paper by Richard Freeman, a labor economist at Harvard. Freeman argues that our labor law needs to be fixed (quoting from the post):

He said unionization elections in the private-sector “have turned into massive employer campaigns against unions.”…

He argued that the penalties in the National Labor Relations Act were weak and “have failed to deter firms from illegal actions to prevent unionization.” He wrote that in the early 1950s firms fired about 0.5 workers for every 100 workers who voted in N.L.R.B. elections, but in the 1980s and early 1990s, firms “fired 4.5 workers for every 100 union voters,” with that percentage dropping slightly in recent years…

One big reason for this, he wrote, is that private-sector employers “have sizable monetary incentives to oppose unionism,” and the penalties that N.L.R.B. “has at its disposal are too limited to offset these incentives.”

In addition to calling for harsher and more targetted penalties (aimed at managers and not just companies), Freeman makes a suggestion that would give workers a voice even without a union:

Lastly, Professor Freeman recommends an idea that union leaders hate — allowing employers to set up employee committees that address not just productivity, but also issues that deal with workers’ well-being, like hours or pace of work. “Throughout the advanced world works councils perform this function, usually with members elected by employees, independent of collective bargaining,” he wrote.

Strong labor laws level the playing field of the labor market. Most labor economists who do study unions choose to apply methods like regression discontinuity to determine if unions raise wages. However, they may not be asking the right questions. Addressing labor laws per se requires an acknowledgment of worker-employer power dynamics, a move most neoclassical economists deem normative (and also hard to measure).

The paper was submitted as part of a symposium at GWU Law on the NLRA. There are a lot more interesting papers at the link above.

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Kick It Over

A campaign has started at Berkeley to attack neoclassical economics and its dominance in the discipline. The students’ manifesto begins,

We the undersigned, make this accusation: that you, the teachers of neoclassical economics and the students that you
graduate, have perpetuated a gigantic fraud upon the world. You claim to work in a pure science of formula and law, but yours is a social science, with all the fragility and uncertainty that this entails. We accuse you of pretending to be what you are not.

Of course, this message could merely fall on deaf ears as it did at Notre Dame, but it need not. The goal of this campaign seems to spread the manifesto to other campuses and create diialogue about the local hegemonies. There’s also an excellent resources website associated with the campaign.

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The economics discipline treats education as a black box. Human capital (a term derived to symbolize human thoughts as part of the production function) is generally proxied by simple variables like educational attainment. More forward thinking scholars will use test score achievement, and the cutting edge will use cognitive ability tests. The video below, though, argues that our whole concept of education discourages “divergent thinking,” the dynamic cognition that leads to innovation and change. Watch the video in which Ken Robinson discusses this issue (it’s another great piece by RSA Animate, which illuminates his words with drawings).

I certainly agree that our narrow educational paradigm likely hinders the number of students who are culled to achieve highly in school. Many would-be geniuses are left behind, and the economy suffers, even under a narrow neoclassical view of what economic progress is. I’m trying to think about how characteristics of this educational system relates to our economic system. We certainly see a move away from the liberal arts in higher education and towards majors that fit better in a capitalist economy, like business and the sciences (the latter aren’t necessarily bad, assuming they leave room for non-formulaic thinking). I;m not sure how this looks at the lower levels- I suppose children taught to toe the line at an earlier age are more likely to take the economic and political system for granted as well. Must educational reform precede real structural change for our economy?

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David Ruccio regularly comments on inequality and its myriad effects on economics, politics, and society (most recently, here and here), and he maintains a page on unequal representations which is a collection of graphic representations of inequality. These efforts are especially important today, because Americans are horribly misinformed about who has money. [ht:cr]

This chart is from a paper called “Building a Better America One Wealth Quintile at a Time” by Dan Ariely and Michael I. Norton.

The top row shows the actual distribution of wealth in America. The richest 20 percent, represented by that blue line, has about 85 percent of the wealth. The next richest 20 percent, represented by that red line, has about 10 percent of the wealth. And the remaining three-fifths of America shares a tiny sliver of the country’s wealth.

Below that, the “Estimated” rows show how different groups think wealth is distributed. As you can see, in people’s misinformed minds things are much more equitable.

Undoubtedly, this has a enormous implications for politics and public discourse surrounding economic issues. And I’m not just talking about the Bush tax cut debate. Realizing that society is so unequal must raise questions about whether our economy is undermining democracy itself in the United States. Realizing that people are far needier than we think should raise questions about conventional notions of freedom, and whether the definition of freedom as the “freedom to choose” is adequate. And hopefully, with papers and writing that spread good information, we can have more informed and more meaningful debates in the public sphere.

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David Ruccio hosts an excellent guest piece by Richard McIntyre and Michael Hilliard, which takes a balanced and heterodox look at the work that merited a Nobel Prize this week. First, their positive take on search theory:

The idea that workers and jobs are heterogeneous and that it takes time and effort to match them is a useful idea. Sweden’s “active labor market policy” sought to reduce frictional unemployment even before the now classic papers on search theory were published. Perhaps this is why the Swedish Central Bank made this award, although speculation about the reasoning behind these awards is not terribly productive in our opinion.

Worker and job heterogeneity means that the metaphor of the market is not an accurate representation of the exchange of labor power for a wage. Because it never occurs to most economists that the analytical apparatus of the market IS a metaphor this is not the usual interpretation of search theory. But those interested in the literary aspects of economics could make something out of search theory.’

However, a critique through the lens of class shows that search theory may be more of a distraction than anything:

More important to us is what search theorists don’t do. As Marx and others have pointed out, it is in the labor process, not the labor exchange, that exploitation occurs. And here employers clearly have the upper hand. Further, many labor market and labor process outcomes—employment, remuneration, working conditions, training—reflect what employers choose to do, except perhaps during short-lived moments of full employment. Since the 1970s, in the United States at least, the rhetoric of labor problems has been mainly about workers rather than employers, and mostly with what workers should do to make their labor time more salable. At best search theory tells us that people are doing something useful while they are unemployed. But for the most part it distracts us from the fact that employers have the upper hand in the labor market and that there is no such thing as democracy inside the firm, where Americans spend most of their waking time.

Of course, approaches to economics that use a class lens are not seen as having the theoretical rigor of neoclassical economics. Thus, I think Ruccio is rather apt to refer to this award at the Nobel Prize in Neoclassical Economics, because the criteria they use to give the award seem to exclude any other approaches.

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Today in microeconomics, we covered the classic model of the Robinson Crusoe economy. But when it came time for the professor to tell the story, they did not even know the title of the Defoe novel from which our dear friend Robinson emerged. It was a bit embarrassing when a student had to explain that the title  is in fact the character’s name, Robinson Crusoe. Of course, many critiques have been made of this metaphor (what about Friday?); but for me, it reinforced a point made earlier that economists don’t generally read, and reminded me of a wonderful passage in an essay by Philip Mirowski that discusses exactly this issue:

This account can be found in nearly every textbook: it is the story of Robinson Crusoe. In the middle of indoctrination of the tyro into our science, we find this story, this artful narrative, of what it means to be a neoclassical rational actor. The isolated individual, alone confronting scarcity on his island with his scant endowments, deliberates as to the appropriate combination of goods to maximize his well-being, imposing order upon the primaeval chaos of Nature. As I have intimated before, economists generally don’t read, but they think they know this story cold. The English hosier in the eighteenth century and the American academic in the twentieth understand each other perfectly, describing the inherent transcendental logic of their own system as it spreads across the face of the globe.

But economists don’t generally read, and therefore they don’t generally realize that the actual Defoe novel does not underwrite their convictions to any appreciable extent. The man who wrote the following might resist being dragooned into the neoclassical cause:

“The most covetous griping miser in the world would have been cured of the vice of covetousness, if he had been in my case; for I possessed infinitely more than I knew what to do with. I had no room for desire, except it was of things which I had not, and they were but trifles… I learned to look more on the bright side of my condition and less upon the dark side and to consider what I enjoyed rather than what I wanted; and this gave me sometime such secret comforts that I cannot express them; and which I take notice of here, to put those discontented people in mind of it who cannot enjoy comfortably what God has given them because they see and covet something He has not given them.” (Defoe, 1941, pp. 126-7)


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Bruce Caldwell elucidates the importance of studying the history of economic thought [ht:sf]. First, it is an important part of a liberal arts education in economics:

When I did my graduate work in economics at UNC, the history of economic thought was one of the core classes that all students had to take. We read and studied the great economists of the past–Smith, Malthus, Marx, Marshall, Keynes–whose insights directed (and sometimes misdirected) the progress of our discipline.  Things have changed dramatically since then. The history of economic thought has virtually disappeared from the graduate curriculum in the United States, and if current trends continue, in a few decades it will have disappeared from the undergraduate curriculum, as well.

This situation is deplorable. The history of economic thought constitutes an essential part of the broader liberal education of economists.

In addition, it is important for how we understand “progress” in economics:

Studying the history of economic thought allows students to see where current theories and ways of thinking came from. In itself that’s a useful exercise, but one with further benefits—for as one learns more about the history of one’s discipline, a whole new set of insights arise. Despite the alleged “progress” in economic thinking over the past two centuries, it is remarkable how many old ideas (both good ones and not so good ones) keep resurfacing. Students need to understand that the idea that we have nothing to learn from the past– a belief too often expressed by economists – is just a scientistic prejudice.

Students who learn about economics without the benefit of a history of thought course are inclined to assume that what they learn from their textbooks is settled fact. They do not see that the development of ideas always involves argumentation and criticism, something that usually disappears in textbook treatments of issues.  History of economic thought courses also expose students to alternatives to mainstream views. Without such a course, an economics student will probably know little or nothing about the likes of Karl Marx, Thorstein Veblen, Carl Menger or F. A. Hayek.

History of economics also opens to the door to an interdisciplinary approach to economics, thereby making us aware of our own disciplinary biases:

Furthermore, the history of economic thought course is one of the few places in the economics curriculum where economists connect economics to other disciplines within the social sciences and humanities. As the title of Robert Heilbroner’s best-selling book, The Worldly Philosophers, emphasizes,economics was the creation of scholars and thinkers who did not see themselves as “economists,” but as people trying to make sense of the social universe in the same way that natural philosophers were trying to make sense of the natural world.

…Disciplinary specialization encourages a form of brain-washing: this is how you are to look at problem x if you are an economist. Studying the history of ideas provides a partial remedy to that. I often tell my students that studying the history of economics is like traveling. Just as the latter makes you aware of your own cultural biases, the former makes you aware of your disciplinary biases.

And lastly, the history is fascinating:

Finally, it has been my experience that undergraduate students love studying the history of economic thought.  Many have even said, in their end of term evaluations, “this course ought to be required for every economics major.”  Students rarely ask for more required courses, but history of economic thought is an exception.

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