Teaching a Newly Introspective Macroeconomics Today

Though my interest in the concept of cryptocurrencies has not ebbed since my last post, I have been diverted for a bit by the discourse surrounding the recent introspection within macroeconomics. A part of me believes or wants to believe that the challenge to the accepted paradigm of monetary economics that cryptocurrencies represent is related to this introspection within macroeconomics. Whatever the case, I think it is worth reviewing where the state of this introspective turn currently stands, how this turn has come about, and how it might apply to the learning and teaching of economics in the US today.

The recent introspection from macroeconomics is coming from many places. Most notable is the recent and freely available edition of the Oxford Review of Economic Policy, in which a number of notable macroeconomists contribute their thoughts to where and how the discipline could improve its models, theory, and policy advice. I have only read the contribution by Professor Wren-Lewis so far – a contribution worth trying to understand for even those of us not trained in the discipline, but within and interested in it nonetheless.

Whatever these contributions might say, it is alone notable that so many significant contributors to the contemporary paradigm of macroeconomic discourse devoted serious time to contributing to it. In some sense, the introspection that has inspired this discourse between the more major, institutional contributors has been on the wall for some time now. Individuals such as Dani Rodrik on trade and globalization, and Branko Milanovic on inequality, have been quite active for quite some time. There have also been very interesting, public debates on important economic issues since the Great Recession. The ones that come to mind immediately include the debates between Paul Krugman and Niall Ferguson about deficits and interest rates, Niall Ferguson and Robert Skidelsky on British austerity policies, Thomas Piketty and the Financial Times (summary here) on Piketty’s data and methods, and a recent wonkish debate about macroeconomic modeling between Brad DeLong, Paul Krugman, Greg Mankiw, and Casey Mulligan. I believe the willingness to spend such time by these contributors indicates how seriously these questions about macroeconomics have become and how long such introspection has been percolating. It, therefore, seems obvious to me that we too (we being those of us lesser economic mortals) should also take this discourse seriously.

Other arguments for macroeconomic introspection and reform are coming now from sources that might be described as less institutional and more grassroots. Freedom from institutional concerns or constraints has provided these contributors with perhaps more freedom to propose creative explanations and solutions – always a fruit of serious introspection. For example, a group of economists has collaborated to create the CORE project.  Contributing economist Samuel Bowles (admittedly, as institutional as the names above) describes CORE’s approach to macroeconomics as a “pluralism by integration.” The pluralism Bowles refers to is an integration of various perspectives and theoretical outcomes that deviate from the paradigmatic norm on an economic topic from within economics and from related disciplines (e.g., political science, sociology, etc.).

So how fruitful is this creativity? Mr. Bowles demonstrates how students benefit from this creative and abnormal pluralism by integration by reviewing how CORE teaches the relationship between the company and the labor market, and its implication for how markets come to value capital goods. According to Bowles, the standard conclusion to learning about this calculation is that the purchase of labor by a company “is no different from its purchase of kilowatts of electricity.” The price of both electricity and labor are determined by the market, and the company purchases however much of that resource it is worth purchasing at that price given the value that the market puts on what that resource will produce. Similarly, the employee is assumed to receive an appropriate remuneration for the effort and time she will expend in producing the company’s good or service given the opportunity costs associated with her potential alternatives for employment and her natural or learned talents. The result of these convergent interests is that the newly hired employee will consistently expend the energy, skills, and time promised by her in order to produce the good or service the employer expects that energy, skill and time to produce. In return, she will consistently receive her remuneration for providing such time, skill, and energy. In this exchange within this market, both participants are having the same needs met equitably via the simple and elegant market mechanism.

The reality of economic experience, however, is that this exchange is neither equitable nor elegant. It is this type of discrepancy between theory and reality that is the animating fire behind this slowly percolating macroeconomic introspection and its proposed responses. One answer coming from CORE and others in this debate is that were students to learn, and economists consistently factor into their modeling, the other variables contributing to the inequality between these two actors, then they would be able to produce better, alternative conclusions about the relationship between a company and the labor market that the current paradigm does not or cannot allow for.

For example, with respect to the problem outlined above, CORE then leads students to several sources that highlight the discrepancy in interests between the two actors. According to Bowles, students of CORE learn that Karl Marx provided the insight that a labor contract “cannot ensure that an employee works hard or well,” an insight later built on by Friedrich Hayek. CORE then leads them through the theoretical insights of economist Ronald Coase and the mathematical proofs of political scientist Herbert Simon to learn that the “distinguishing mark of the firm is the suppression of the price mechanism,” often by demanding less labor in spite of the surplus value the foregone labor might have produced for the employer. By the end of this tour away from paradigmatic macroeconomics and its assumptions is that our hypothetical employee is hence more likely to not receive a wage that adequately compensates her for the opportunity costs of her time. One potential result of this outcome at the level of the macroeconomy is that in the aggregate, the demand for labor will be lower than supply, which leads to increasing unemployment.

The pedagogical results of this integration demonstrate CORE’s ability to show students that “useful insights [into economic issues] can come from many sources and provides tools allowing them to address pressing economic problems of today.” It also shows the fruit of the introspection macroeconomics is undergoing. There remain other important, grassroots contributors championing such introspection and creative thinking around similar issues in economics, including the Rebuilding Macroeconomics project of the Economic and Social Research Council in the United Kingdom, Rethinking Economics, and Evonomics.

It is unfortunate that much of this discourse and advocacy appears especially strong in the UK, and not in other places. Assuredly the teaching and learning of economics could benefit from a fruitful introspection at all levels. The universality of economic principles in free markets obviously transcends national borders, and if changes in their teaching are good in one market they are also assuredly good in another. As a teacher of Advanced Placement economics in the United States myself, I can’t help but apply such a possibility to my own teaching. Are student outcomes better if they begin a sequence of both micro- and macroeconomics with micro first? Is teaching and assessing the standard models in both courses still beneficial for my students who plan to pursue the study of economics, business, finance in college? Does the way we assess economics students currently make the most sense (AP and IB, for example, assess their students in different ways)? Would the study of economic concepts and principles be better if their curriculums, texts, and assessments were rewritten to include a more diverse study of economic history and competing theorists?

Whatever the case, it is an exciting time to follow these debates about economics. For me, this is most especially true for what they imply about how its study is best pursued by its newest students, and hoe to endow them with the types of critical thinking and expressive skills that are unique to the study of and discourse about economics. Let’s hope it continues.

Market Illegitimacy and Cryptocurrencies.

Anyone paying attention to the recent financial or economic news is aware of the recent surge of interest in and purchasing of Bitcoin. The stubborn presence of Bitcoin in economic, financial, and general current events discourse leads me to wonder if this surge is merely a fad or a sign of something deeper. Personally, I am beginning to wonder if cryptocurrencies and their surge in popularity are a product of free markets failing to legitimize themselves in the eyes and outcomes of its main actors?

If so, then cryptocurrencies promise to persist indefinitely. Yet, as far as I can tell, most mainstream economists and political economists (and others) have insisted that these cryptocurrencies are merely bubbles. Were they not bubbles, and a genuine reflection of dissatisfaction with the outcomes that most economic actors are experiencing in today’s generally free markets instead (especially in the West), then the establishment of elite discourse will eventually be rushing to understand this new underground economy of currency at some point in the future.

As such, there remain some persistent questions that should be considered in establishing the seriousness and import of cryptocurrencies. First, what is it about the concept of cryptocurrencies that are ostensibly so popular so as to be driving interest in it? Secondly, is/can one aspect of this interest in cryptocurrencies plausibly be due to a belief in the illegitimacy of contemporary currency arrangements?  Is there a real resistance by an “establishment,” and for what reasons are they resisting the legitimacy of cryptocurrency? Lastly, to what extent do cryptocurrencies offer any potential benefit and harm to society, and are those trade-offs worth it?

Beneath each of these questions lay a wealth of intellectual possibility. This wealth is constituted by a myriad of subquestions, each with its own significant intellectual history and literature. So too is this wealth constituted by the myriad of divergent conclusions that one could reach given the infancy of cryptocurrency’s life within our current paradigm of thought in economics and political economy (among other potentially interested disciplines).

Whatever the case, I think it notable that such a young, potentially paradigm leaping currency has caught enough interest to evoke commentary from elite discussants – and I am hooked on the thought of discovering what this popularity might mean for our current understanding in economics, political economy, and the future of social relations. For now, I think it is safe to say that cryptocurrency’s popularity can be partly pinned on the presumed illegitimacy of contemporary markets. For better or worse, the increase in inequality and the concentration of wealth into fewer and fewer hands is a real experience. If one admits to that fact, then it isn’t a large leap to take the next two steps: that this inequality is antithetical to the narrative and logic that drives beliefs in free markets, and hence their legitimacy; and two, that this experience of inequality makes it easy and likely that viable alternatives to this free market paradigm will be ever-more persuasive to economic actors, giving them a legitimacy of their own.

In other words, cryptocurrencies should not be taken for granted.

Taxes and Effective Governance

I read recently a blog by Ann Alstott, a Professor at Yale Law School. One of Alstott’s arguments in there is that eliminating deductions for state and local property taxes, as the tax bills do, punishes the effective governance achieved in high tax states as a result of having higher property tax rates. In defending this argument, Alstott includes the interesting claim that the debate over eliminating these deductions “implicitly asserts that “high taxes” are a bad thing and disclaims any positive relationship between tax revenue and robust governance.”

This is a provocative and important claim if true.  Is there any evidence, therefore, that higher tax states are more effective in achieving their purpose than their lower taxed peers?

As I see it, to evaluate this claim and its relationship to her argument about punishing effective governance, we must ascertain the objective truths to the following questions:

  1. How might we define or determine “effective governance”?
  2. Do “high tax states” have high property taxes, or does that burden fall elsewhere in their tax codes?
  3. Is there a clear relationship between the characteristics delineated for number one above and those identified for number two after it?

The term “effective governance” could mean many things to many people. For example, a small government conservative might evaluate the size and scope of the federal government (the smaller, the better) and its ability to maintain the delivery of “essential services” (e.g., a military, free markets, etc.). On the other hand, a traditional liberal might instead evaluate levels of social and economic equality, and the trade-offs made to ensure or attempt to realize such goals when determining “effective.” Whatever the rubric, such evaluations are rife with possibilities for dissension, and any attempt to assert one’s rubric will inevitably invoke ire from a differing perspective.

So in order to avoid the inevitable arguments stemming from this attempt to narrow the definition of “effective,” I have chosen to use the ranking of states by U.S. News and World Reports. According to its published methodology, U.S. News evaluated a total of 68 measures in nine broad categories. These categories included health, infrastructure, education, government, and economy, among others.  For my purposes here, I will assume that these categories adequately encompass characteristics and/or outcomes that most Americans would accept as contributing to “effective” government, and that is significantly affected by the public policies of their state governments (which would include taxation rates).

If this list represents our “effective” schema, our next step is to correlate their rankings to their tax burdens – specifically, property taxes, since those taxes generate the most revenue for state coffers, and are the taxes whose deductions on federal taxes will be removed (thus increasing the real cost of one’s property). To correlate this list to tax burden, I looked at two sources. The first is a list from Forbes that uses tax rates from 2016. The second is a ranking from the Tax Foundation using measures form 2012. The last was a list published by Realtor Magazine of the 10 states with both the highest and lowest property tax rates, respectively. If we compare these lists, we find the following:

  1. Only two of the top ten “best” states are ranked by both tax burden lists in their top respective top tens (MN[6,8], MD [7,7), and one came really close (VT [9,11]).
  2. Only two of the top ten “best” states were identified in the top ten of property taxes (NH[4], VT[5]).
  3. Eleven of the top twenty “best” states are within the top sixteen states with the highest tax burdens.
  4. Five of the ten states with the highest property taxes fall within the top twenty “best” states ranking.

From this, we can reasonably conclude that the tax burden in these best states usually falls elsewhere in their tax codes. As such, most of these “best” states (fifteen of the top twenty) will not see significant changes to their revenue from the elimination of these property tax deductions. In other words, most of the highest tax states gain revenue from other portions of their tax code and are less likely to be affected by the elimination of these deductions.

What is also clear, however, is that many of the “best” states do burden their residents with more of a tax burden than others. According to these lists, eleven states of the top twenty “best” states are within the top twenty states with the highest tax burden. Because the measures identified by U.S. News require revenue from taxes to operationalize, it is fair to conclude that these higher taxed states use their revenue to effective ends. To put another way, they spend their money appropriately (understood as spending on those activities that are most necessary to be an effective government). As such, Professor Alstott appears to be correct: high taxes do not mean bad government. In many cases, high taxes mean effective government, if not in most states.

To be clear, this is not to imply that the converse is also false; that low taxes equate to ineffective governance. Several of the states on these lists provide counterpoints. For example, New Hampshire is ranked as the second “best” state while also being ranked as one of the top ten in lowest tax burdens (it is ranked as having the fourth highest property tax rates).

So don’t buy the lie that taxes are bad. Instead, when left to states, taxes can be a very good thing.

 

Moral Obligations and Development Assistance

 

The topic being debated by Lincoln-Douglas debaters in November and December is a timely one. Since The Great Recession’s onset in 2007, American discourse has been rife with questions and opinions on or about inequality. So too has the field of economics itself been jolted into addressing causes and effects of inequality in contemporary economic systems, with new popularity afforded accorded to those who can do so in a compelling and persuasive way. The November/December resolution also beholds inequality at its root. Specifically, the resolution attempts to resolve the inequality of outcomes that has plagued modern statehood since its inception by affirming that wealthy states have an obligation to transfer resources from themselves to those states who have not. There are several features of this resolution, therefore, that debators must attend to carefully in order to be thorough and to avoid the pitfalls that so often befalls public discourse.

Interpreting Terms/Agent of Action – “wealthy” “nations”

For the November/December resolution, two terms must be clearly delineated in order to be as thorough as possible” “wealthy;” and “nations.” “Wealth” may be understood as being “characterized by abundance.” In order to be wealthy, therefore, one must possess an abundance of something. But what must that abundant something do in order reasonably deliver its possessor as “wealthy?” The fields of economics, political economy, history, political science, and other disciplines concerned with “wealth” at some level would likely suggest that the abundant possession could not be characterize as “wealth” if it did not provide access to other desired resources or goods – needs and wants in economics. So perhaps a more specific definition is better. For example, the Oxford Dictionary defines “wealthy” as “having a great deal of money, assets, or resources.” Which ever definition you choose, be aware of how its specificity, or lack thereof, can open your argument up to criticisms, and prepare blocks. Similarly, listen for vague or broad definitions of “wealthy;” they can provide an access point to criticism of your opponent.

If we accept that “wealthy” refers to the possession of a resource that provides a means to satisfy needs and wants, then one must also consider the types of resources themselves. Generally, “resources” are assumed to always be plural. For example, a nation rich in mineral deposits is not likely to only have one deposit where that mineral can be mined from or just one mineral to mine. Instead, they would likely have many deposits for that mineral to be mined out of, and/or many minerals to mine. In either case, the possessor has access to an abundance of it, which provided them with a means to satisfy other needs and wants that cannot be satisfied with those mineral deposits alone. That distinction between which resources one possesses an abundance of is an important one. Is it fair to characterize a person, family, or nation-state as wealthy if it only has an abundance of one resource; say corn? Perhaps we may do so if the abundance of that resource provides for all of the possessor’s needs and wants. If that resource cannot offer access to the satisfaction of the possessor needs and wants, is it still fair to characterize that possessor as “wealthy?” In other words, the wealth derived from the possession of an abundant resource depends on the demand for that resource, and/or the ability of that resource to be adapted to meet the various needs and wants of the possessors of it, and the demanders for it. As such, in your arguments you should take care to be clear what “wealthy” is referring to. For if “wealthy” is not specified clearly, your argument is open to challenges, and your conclusions potentially undermined.

Resolution Structure – the moral confinement of “an obligation to.”

The definitions of individual terms above carry downfalls and upsides for the debater; downfalls and upsides that each should take seriously. To generalize, however,  individual definitions may fail to gain enough traction for certain resolutions – including this one. For if one considers the larger clause within which these terms are placed, there emerges a larger question over the nature of the resolution itself. To be more specific, the resolution appears to not question that obligation of wealthy nations to transfer their resources to the non-wealthy. The resolution instead states it as if it is a fact. As such, the resolution as a whole must be considered from a positive perspective, as well as evaluated if it has the potential for being a normative statement grounded in moral or ethical considerations. The fruit of such analysis lay with the phrase “an obligation to.”

According to Merriam-Webster, to “obligate” means “to bind legally or morally: constrain.”

When “obligate” is operationalized for this resolution, therefore, it may by understood to mean a moral or legal expectation that constrains one to a course of action. To rephrase the resolution with these definitions in mind, it is reasonable to interpret it as saying that regarding their relationship to other nations, wealthy nations are morally and/or legally  expected to constrain themselves to activities that provide development assistance to these nations. Interpreting the resolution in this way has the further advantage of incorporating a normative element; morality. As such, most cases will rely on morality as their value criterion, setting up the clash of values expected of an LD debate round.

Analyzing the Action – “provide development assistance”

According to Merriam-Webster, to “provide” means to “supply something for sustenance or support.” Classifying such aid as “official development aid), the Organization for Economic and Cooperative Development limits such supply to that provided by “official agencies, including state and local governments… which is administered with the promotion of economic development and welfare of developing countries as its main objective, [and is] concessional in nature [conveying] a grant element of at least twenty-five percent.” This particular definition has the benefit of specifying an amount of aid that qualifies as ODA without limiting the amount that qualifies. In doing so, the OECD admits into its definition the possibility of providing an amount of ODA that is somehow returned back to the provider. This possibility opens up several new avenues we must consider regarding the moral nature of the ODA. Most importantly, this definition appears to embolden the limit that our understanding of “an obligation to” above asserts. Specifically, that ODA must be limited to assistance provided by governments (national, state, and local are all acceptable), and for the promotion of economic development and the general welfare of developing nations. The emphasis must, therefore, be placed on what is considered to be a “developing” nation, and what is not. For if assistance were not specified and left alone instead, then all nations would qualify since all are generally under constant development in some way.

In order to engage the moral constraint imposed by our definition of “obligation” above, we have to clarify, therefore, which developing nations should receive such assistance. This will present a potentially fruitful avenue for debaters in cross-examination because defining “developing” uniformly has proven illusory. As is helpfully reviewed by Marc Silver from National Public Radio (NPR) in 2015, “developing” is fraught with differences depending on the organization producing the data about it.  The World Bank, for example, refines its development research and activities to three areas it determines essential to improving the welfare of those people in need of aid: human development; social development; and rural and urban development. The United Nations’ Human Development Index (UN HDI) identifies four areas it determines as essential to development: life expectancy at birth; expected years of schooling; mean years of schooling; and Gross National Income (GNI) per capita. The World Health Organization (WHO) focuses its metrics for development on health measures instead, such as child mortality and communicable diseases. In other words, “development” is rife with dissension. Debaters should thus choose wisely, and be prepared with some of the statistics provided freely by the sites above.

Deontology or Utilitarianism?

For our purposes in this overview, we will consider development to be aid given by the official agencies of a nation in the upper quarter of the HDI to one in the lower quarter of the HDI for the improvement of economic and health outcomes. With this refined definition, we can assess the current state of development assistance.

The status quo of contemporary development assistance is as multi-faceted as its terms are. According to Yumeka Hirano and Shigero Thomas Hatsubo of the World Bank, “Aid is Good for the Poor.” In their article, they claim that the results of their research about whom aid benefits most prove that development plays an important role in assisting developing countries to find the optimal mix of economic and social aid to achieve poverty reduction and effectively share prosperity.” By improving the likelihood that increased prosperity and decreased poverty result from developmental aid, the moral conditions of “an obligation to” appear to be met.

Contemporary wealthy nation-states seem to agree that there lies a moral obligation to provide development assistance to other nations. A report by the OECD in 2013 illustrated an increase in developmental aid from the members of its Developmental Aid Committee (DAC) – a committee comprised of the 28 largest nation-state contributors to developmental aid. In 2013, 17 of its members increased their aid, including five who contributed seven percent of their gross domestic product (GDP). This increase equates in real terms to approximately twenty-nine billion dollars to the African continent alone. According to the World Economic Forum, the largest ten contributors to ODA contributed approximately 116 billion dollars in ODA.

The normative reality of ODA, however, is but a sliver of the larger issue debaters are expected to address in this resolution. After all, the resolution should not be read as a mere statement of fact –  a misread of generous proportions. Instead, the resolution is asking if nations should provide aid; if they have a moral obligation to provide aid.

How does one judge whether one is morally obligated to perform a specific act? Kant has a useful answer and is thus likely to find favor for those arguing in the affirmative from a deontological position. Kant’s categorical imperative asserts that every possible or potential agent is unconditionally (i.e., categorically)  obliged to act (imperative) toward a specified end if that end can be justified as good by their rational will. Though fraught with potential counterarguments, it is not unreasonable to understand “good” herein as those ends that we naturally desire or expect for ourselves. Rational beings, in other words, do not naturally seek ends that are not good for themselves and are therefore constantly compelled by their will to seek those ends out. As such, aid to another actor is natural and good if it is sought out by and performed because of the actor’s rational will. Since this principle is unconditionally applied to all with rational wills, and since Kant understands all humans as possessing a rational will, then any end sought by said will is simultaneously good and assumed to be a universal end by all humans on account of their rational will. Because the actor in the resolution is “nations,” we have to consider further if it is reasonable to extend the label of “individual” with a rational will to nations themselves. According to University of Pennsylvania Professor Thomas Donaldson, Kant “sees the state as analogous to a human person and subject to most if not all of the obligations to which individuals are subject to.”  ( Ethics and International Affairs, “International Deontology Defended: A Response to Russell Hardin”, pg. 147-154). Nation-states, therefore, are required to provide development assistance because they are possessed with a rational will that obligates them to act in ways that could simultaneously be expected of all others, including themselves. For this framework to be operationalized, the debater need only prove that the aid provided by one nation to another is aid given freely by its rational will (perhaps the concept of “the general will” a la Rousseau will be useful here too), is considered good since the providing nation does not ostensibly discriminate between recipients (hence unconditional), and willfully accepts similar aid in return if and when in the same position as the receiving nation (again, in order to affirm the act’s unconditionally. For if the act is unconditional, all states benefit from the unconditionally applied acts of free willing nations)

If operationalizing a deontological framework, however, one will likely have to contend with the theory of soft power – an ascendant theory in the professional theoretical literature of political theory, foreign policy, and international relations. According to International Relations scholar John Ikenberry, soft power refers to “the ability of a country to persuade others to do what it wants without force or coercion.” In short, winning hearts and minds is just as important to a nation’s standing as its ability to win a war is. Under this conceptual umbrella, Kant’s deontological framework for international relations cannot be understood as entirely normative. That is, no rationally willed act is done without some benefit accruing to the providing actor. Within the context of this resolution, no ODA can be entirely benevolent. Peter Singer, a bioethicist from Princeton University, emphasized this very point in a piece written for Project Syndicate in 2017. “All US aid [is not] directed to those in greatest need,” says Singer, and are instead “based on what are perceived to be US geopolitical interests.”

Another useful framework to pursue moral obligation for this resolution is through the utilitarian principle. Utilitarianism asserts that any action or policy that maximizes the benefits conferred onto individuals is the most morally appropriate action or policy. In other words, does the policy proposal under view make more people happy than are currently under the status quo? Utilitarianism thus has the benefit of inviting a more quantitative analysis – an important benefit for a resolution so pregnant with possibilities for quantitative data. From a utilitarian perspective, it might be hard to argue that the status quo is not enough to satisfy the moral component of this resolution. After all, as is noted above by the OECD, most of the wealthy nations have increased their contributions in recent years. More people, therefore, are arguably happier under this arrangement than in years past, thus satisfying the moral obligation the resolution commands. Any attempt to further entrench this moral obligation could reverse these increases, leading to less happiness, and falling short of the utilitarian rubric.

Several other attendant and valid issues arise from both perspectives that either criterion must resolve. One such issue is the historical legacy of contemporary developed nations within these needy nations today. From both perspectives, today’s developed nations owe a debt to the native peoples of these needy nations. For their legacy of extractive colonialism rendered these nations unable to develop sufficiently as independent nations. Deontologically, providing aid satisfies the categorical imperative since the developed nations might reasonably demand such aid were the situation to be reversed. The Marshall Plan, for example, might be cited on these grounds as sufficient evidence to justify a deontological value since the aid provided by the United States under the Marshall Plan inaugurated a bi-lateral aid relationship that has persisted into contemporary time in various forms (including several I have cited in here, such as the OECD).

Neither of these values need not be the only ones invoked. Justice will also play its own role, for example, if the debater chooses to highlight the historical relationship between developed and under developed nations. Another area of particular strength for a justice value might even cite terrorism as a cause for affirming the resolution. There is a rich body of literature attempting to causally link deteriorating economic, social, and political conditions to the creation of extremism. Providing aid is thus just since it corrects a historical wrong that has since caused harm.

Conclusion

These are but a few of the many directions this resolution may take. Because of the resolution itself and the way it is constructed, it is important to seriously consider the terms under use and their explicit and implicit effects on the major action being suggested: providing developmental assistance. From there, the debates should be highly engaging without losing its analytical edge.

Monopolies and Economies of Scale

Discussion today included a brief divergence into monopoly power. Such a divergence is natural given that we were discussing long-run Average Total Costs (ATCs), economies of scale, and the minimum efficient scale (MES). Generally speaking, industry’s with fewer producers are characterized by economies of scale over larger quantities of output. If that is the case (reasoned the student), then aren’t monopolies good since they are more likely to achieve a lower MES quotient then firms in industries with many competitors and economies of scale spread over fewer units of output? In other words, don’t we want monopolies?

As with any answer in economics, it all depends.

In my response during the ensuing discussion, I referenced a recent article by Joseph Stiglitz. As I read it, Stiglitz does not argue that monopolies are bad per se. Instead, Stiglitz argues that in the type of policy environment that characterizes America’s political economy since the 2000s, monopolies have abused their market position in a way that benefits the few over the many. These benefits may be seen in the disproportionate salaries and bonuses of their executives when set against wages for employees. In other words, long-run efficiency gains and their expectant lower ATCs have not been returned to employees in the form of wages. Instead, their monopoly position has been returned to the executives of the company.

Are these disproportionate returns worth it? From one perspective, yes. After all, their monopoly or monopoly-like position has decreased costs, which in turn lowers their product’s price. This leaves me the buyer with more resources to pursue other means to utility. From another perspective though, such disproportionate returns are not worth it. After all, with average workers not seeing these returns translate into higher wages, they are left with fewer resources (i.e., money) to spend. When this happens in many firms in many industries simultaneously, the resulting decrease in aggregate demand is too significant to ignore. Unless the concentration of returns in the elite leads them to spend more of their new resources to make up for that loss in aggregate demand (and as we know, they don’t), there will be fewer people spending any money. This can then lead to increased costs to make up for the loss of customers, thereby negating the benefits of the monopoly’s lower ATC curve.

Read this today!

 

 

Several articles today provide good opportunities to apply the Production Possibilities Curve to contemporary economic events. Could you identify how either of these articles would contribute to either growth and/or development in the American macroeconomy, and/or individual firms? How might such growth be graphically represented?

https://www.bloomberg.com/view/articles/2017-09-21/deregulation-of-air-safety-rules-can-be-a-model?utm_content=view&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-view

A lot of news and punditry has been devoted recently to the Graham-Cassidy bill to repeal and replace the Affordable Care Act (i.e., ACA, a.k.a., Obamacare). There is nothing new in the bill that makes it demonstrably better than its previous and failed iterations. Personally, I hoped Sen. Graham would be one capable of simultaneously demonstrating empathy and sound policy decision-making, but alas my hopes are now dashed with his sponsorship of this bill. Most importantly, because he supports a vote for a bill without any knowledge of its effects that would otherwise be provided by the reliable and nonpartisan Congressional Budget Office. What’s more, their insistence on voting for it without a score suggests that they are aware of what a CBO score will reveal – a bill that does more harm to most Americans than Obamacare or no bill at all. For information and analysis of the bill:

https://m.dailykos.com/stories/1700084

https://www.cbpp.org/blog/cassidy-grahams-waiver-authority-would-gut-protections-for-people-with-pre-existing-conditions

https://www.vox.com/policy-and-politics/2017/9/20/16341442/cassidy-health-plan-misleading-numbers

https://www.washingtonpost.com/news/powerpost/paloma/the-health-202/2017/09/21/the-health-202-how-many-more-people-would-lack-coverage-under-cassidy-graham-we-can-guess/59c2b43530fb045176650d91/?hpid=hp_hp-top-table-main_pkcapitol-855a%3Ahomepage%2Fstory&utm_term=.251d7aa38879

Saty woke.

JH

Contemporary Deadweight (Loss, that is).

Deadweight loss in economics refers to a loss in total welfare among market participants. In economic markets, deadweight loss occurs when the supply and demand forces are stopped from interacting to produce an equilibrium price and quantity. Two recent news items provide good examples of the concept at work: one from a pure economics perspective; the other from a political economy perspective.

To understand deadweight loss one must first understand the basics of supply and demand, and how each curve produces a point of equilibrium. The two primary agents in any competitive market are producers and consumers. Each has its own curve that reveals a series of price/quantity combinations they would be willing to agree to. For consumers, it is a demand curve, and for producers, it is a supply curve. Neither of these curves exists in isolation, and hence interact to produce market equilibrium: the point where demand and supply meet. All of the points on the supply and demand curves prior to that equilibrium combine to create economic welfare, or total welfare (TW). That is, at any price/quantity combination before equilibrium on their respective curves, both producers and consumers will be maximizing their welfare. Consumers (demanders) will be maximizing their welfare because any price prior to equilibrium is a higher price they would have been willing to pay but now do not have to since equilibrium price is lower on the demand curve, according to the law of demand. Now that the market is in equilibrium with a lower price, they have more money left to consume other products they need or want. Hence, their welfare is being maximized.

So too are producers maximizing their welfare: any point on a supply curve represents a price/quantity combination that we can safely assume results in a profit for the producer. Though producers would prefer to produce more of a good or service at higher prices (law of supply), their concerns for profit limit them to produce at the point where the demand curve crosses their supply curve.  Therefore, one can understand any point on a supply curve prior to equilibrium as one the producer would have been willing to produce at but now does not have to be limited to since equilibrium is higher (and hence profits will be higher).

Graphically, market equilibrium and total welfare look like this, with equilibrium being represented by the dot in the middle, and TW being represented by the area prior to equilibrium, below the demand curve, and above the supply curve:

equilibriummaster

Deadweight loss occurs when there is a mismatch between these curves, resulting in a surplus of welfare for the consumer and producer, and hence a loss of total welfare. For example, assume a producer was limited to charging $40 dollars for their product represented by the market above. Limiting producers to charging $40 would encourage them to produce a quantity below equilibrium – say, 400 gallons. In other words, though they could be producing 100 more gallons to be sold at a higher cost, they are not being allowed to. Hence, their welfare has been limited. But so too has the consumer’s welfare been limited. At $40 consumers are demanding more milk – say 600 gallons. Because they cannot obtain that milk at that price, their welfare has also been limited. Both losses of welfare slow an economy down – weigh it down –  by misallocating resources (more milk could be produced if the price were allowed to rise, more money could be spent if producers were allowed to raise the price). That loss to the economy is deadweight loss.

1200px-Deadweight-loss-price-ceiling.svg

A good example of this occurring in the real world is in the labor market for construction. As is noted by the New York Times today, a construction executive revealed to Congress in March that their industry was short approximately 100,000 workers in spite of business being similar to their market in 2007. In other words, though demand for construction labor is as high as it was prior to the Great Recession’s onset – which should translate to higher labor prices (i.e., wages) for construction firms in order to attract labor in order to meet that supply -, the supply of labor to that industry has fallen short of what it should be. Being in disequilibrium, total welfare is not being maximized. For construction firms are willing to hire – demanding – up to 100,000 more workers (consumer surplus), which would lead to more construction (quantity), and hence to more profit. If that could happen, their welfare would be maximized. For suppliers of labor – workers – their welfare is not being maximized as well: the labor market is willing to supply a higher quantity of labor it cannot currently (producer surplus). If it could supply that labor, the price of all labor would rise (through forces of competition), thus maximizing the total welfare of all current and future labor suppliers in the labor market.

A less obvious example of deadweight loss, but no less important, comes from the political economy perspective. Former Greek Finance Minister Yanis Varoufakis offered this week his own prescription for mending the political ailments of the West’s contemporary political economy. According to Varoufakis, the cause of these ailments is something akin to deadweight loss in the political sphere. The introduction of previously outsider ideas and politicians into mainstream (read: more centrist, less extreme) politics is “the result [of] a situation in which the political establishment’s once unassailable authority has died, but before any credible replacement has been born. The cloud of uncertainty and volatility that envelops us today is the product of this gap.”

The gap Varoufakis refers to may be understood as deadweight loss. According to his analysis, the supply of a governing authority with enough legitimacy among the necessary parties concerned so as to be considered “unassailable” has been lower than the demand by concerned parties for them. For whatever reason, unassailable ideas (i.e., centrist ideas), or politicians beholding these ideas that are electable, has not been supplied to the electorate by those arenas typically producing these ideas and/or politicians in spite of a demand for them. This has lead to a situation where voters and other concerned parties are therefore instead willing to pay a higher price (a broader constituency of voters) for candidates with less popular appeal. The welfare for political demanders (i.e., voters), and political suppliers (i.e., ideas and politicians) has both been sacrificed, leading to a loss in total welfare, and the rise of “extremist” candidates and ideas.

But don’t bother explaining these concepts to Energy Secretary Rick Perry; he clearly needs a lot more help on the basics of economics, energy, education,…