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Economics Anti-Textbook

“Economics for the Rest of Us' by Moshe Adler

“Econned”

“Economism” by James Kwak

From 'Economics For the Rest of Us' by Moshe Adler

OVERVIEW

The basic problem: Whenever it's necessary to choose sides between the rich and the poor, between the
powerful and the powerless, or between workers and corporations, economists are all too often of one
mine: according to conventional economic theory, what's good for the rich and the powerful is good for
'the economy.' In other words, mainstream economics is propaganda masquerading as science.

Two cornerstones of mainstream economics: Economic efficiency and how wages are defined.

Economic efficiency: When economists claim that 'the free market is efficient,' regardless of how
skewed its distribution of resources or of how much suffering it produces, and when they oppose
government intervention to decrease inequality and reduce suffering, it is their definition of efficiency
that they rely on.
But is this the only valid definition of economic efficiency?
Economists have a choice in how to conceptualize efficiency. An earlier definition of economic
efficiency was sensitive to the distribution of income and suggests that to increase efficiency the
government should redistribute resources from rich to poor. The definition adopted by economists was
developed as an attempt to discredit the earlier definition. But we'll see that it isn't clear that the
redistribution version can be discredited so easily.

Economists are divided on most important issues, because the empirical evidence is scanty and not
definitive.

The idea that high taxes are inefficient has dominated US tax policy over the last thirty to forty years.
As we'll see, what makes this implausible claim appear plausible is the basic model that
economists use for analyzing the labor market. The model assumes that employees are free to
choose the number f hours they work and that when they are paid less they will work less. It also
assumes that workers do not enjoy work and are shirkers by nature. It is a model of an economy
of disconnected individuals who are neither tied to other individuals and to capital in the
production process nor governed by any social norms. In such a model, no outcome can be ruled
out and any outcome is equally plausible.

Distribution of income is often thought of as a stage that comes after goods are produced and sold. But
the two form a causal loop: the distribution of income determines what and how much will be
produced in the first place. An unequal distribution of income often leads to a decrease in the size
of the economic pie.
Example: Production and distribution of AIDS drugs. Poor people in developing countries can't
afford these drugs not because they are objectively poor, but because they are poorer than people in
developed countries. The drug companies choose to price drugs for AIDS beyond the reach of the
people of the Third World because it is more profitable to sell these drugs at high prices that only
people int eh First World can afford, rather than sell them at low prices all over the world.

Paradoxically, we'll see that with the economists' definition of economic efficiency, it is possible to
conclude that 'the economy' is growing at the same time that most people in that economy have
less.

Theory of Wages and Executive Compensation:

How is inequality created to begin with? Why does one person make in an hour what another makes in
a week or month or year? The 'neo-classical' theory couldn't be simpler: a person is paid what she is
worth to her employer. If she earns 7.25/hour, then her contribution to her employer is 7.25/hour. And
if she is paid many thousands of dollars an hour, then her contribution to her employer is also that
much greater.
But this isn't the only theory of wages and compensation that exists. The neo-classical
theory was invented to replace the 'classical' theory, which argued that pay rates are determined not
by contributions to production – which is a meaningless concept, as we'll see – but by the relative
bargaining strengths of the different parties. The empirical data supports this classical theory and is
inconsistent with the neo-classical theory.

If pay rates are determined by bargaining power, what determines bargaining power? When it comes to
workers, laws and government policies play a decisive role.
Union rights
Minimum wage law
Unemployment insurance
Social Security
Welfare
Enforcement of immigrant rights

all combine to determine the ability of workers to say no to low wages. All have been eroded since
the 80s. This erosion has demonstrably negatively impacted workers' well-being.

Unlike workers, executives who bargain with their employers often have the upper hand. In this case,
economists have a very good, simple explanation why: the employers of executives are their
companies' shareholders, and when each company is owned by a great number of different
shareholders, there is nobody to mind the store. This theory is merely an application of the classical
theory of wages, which relies on bargaining power to explain rates of pay.

ECONOMIC EFFICIENCY AND THE ROLE OF GOVERNMENT

Basic idea: The Pie of Happiness: A pie is a good way to think about the well-being – or happiness that
an economy produces. It turns out that the pie of happiness is largest when the resources of society
are distributed equally. Inequality makes the pie smaller.
Bentham and Utilitarianism

Bentham's theory off the efficient degree of redistribution was based on three building blocks:

I The happiness of a society consists of the sum of the happinesses of each of its members

2 An efficient allocation of resources is one that maximizes the happiness of society

3 The happiness that a person gets from an additional dollar increases as the number of dollars that
person has increases.

“Happiness” has been replaced by “utility.”

The marginal utility of money – I.e its ability to buy 'utils' – decreases with the amount of money. So
more income yields more utility, but the relationship is not linear: while an extra dollar always brings
additional utility, this additional utility gets smaller as a person's income increases.

A rich person is higher on the utility function than a poor person. Therefore, if a dollar is transferred
from the rich to the poor, the loss of utility to the rich will be less than the gain in utility to the poor.
The transfer of a dollar from the rich person to the poorer person will therefore increase the sum of
utilities of these two individuals.

Where should this process of redistribution stop? When each person has the same amount of money,
because this will maximize the sum of their utilities. Off this point, you could increase utility by taking
income from one and giving it to the other.

So the pie of happiness is biggest – and therefore utilitarian efficiency is achieved – when the pie is
divided exactly equally.

On this basis, Bentham was an effective agitator for equality.

But utilitarianism as a yardstick for economic efficiency did not survive. It was supplanted wholly and
with complete success by another definition of efficiency, invented by Pareto.

How and why did Pareto dismiss utilitarianism? According to Pareto, Bentham was not necessarily
right. Bentham assumed that the only difference between a rich person and poor person was in how
much money they had: given the same amounts of money, they would have exactly the samea mounts
of utlity.

But according to Pareto, rich people and poor people may be fundamentally different. In this
scenario, transferring money from rich to poor could actually hurt the rich more than it would
help the poor. He used an extreme hypothetical example to illustrate this possibility. What if the rich
actually enjoy the poverty of the poor? He asked. Then reducing poverty by redistribution may hurt the
rich more than it would help the poor, Pareto argued. 'Assume a collectivity made up of a wolf and a
sheep. The happiness of the wolf consists in eating the sheep, that of the sheep in not being eaten.
How is this collectivity to be made happy?”
So this boils down to the question: What if

Kwak, “Economism”:

“A way of seeing the world, such as economism, does not become widespread and influential
because it is more accurate or correct than the alternatives. Instead, worldviews become powerful
because they reflect the beliefs and serve the purposes of an important interest group. While
communism appealed to the downtrodden industrial working class of 19th century Europe, in mid-20th
century America it was the owners of capital whose fortunes were at a historic low: in the 1950s and
1960s, the share of income received by the top 1 percent fell to only half the level reached early in the
20th century. The predominant ethos of the New Deal, formed amid the trauma of the Great Depression
and strengthened by the shared sacrifice of WWII, conceived of society as a collective body with the
obligation to protect its members against the risks of modern life. For intellectuals and business-people
who found the postwar political climate to be toxic, economism was the perfect antidote. On one level,
militantly conservative and libertarian thinkers – economists like Hayek and Friedman, journalists like
Henry Hazlitt and William F Buckley, and politicians like Barry Goldwater and Ronald Reagan –
argued explicitly for lower taxes, smaller government, and lighter regulation. On another level, the
Economics 1011 model of competitive markets driven by supply and demand seeped into
mainstream discourse, separating itself from explicit political ideology to become the Swiss Army
knife of social and economic commentary.
Today, economism reflects the preferences and interests of the very rich more than those of
ordinary citizens. Recent research by the political scientists Benamin Page, Larry Bartels, and Jason
Seawright shows just how much influence money has on people's beliefs about important issues. For
example, 78 percent of Americans think that the minimum wage should be set so no full-time workers
live in poverty, but only 40 percent of the wealthy; 46 percent think the government should reduce
large differences in income, but only 13 percent of the wealthy; and 61 percent favor national health
insurance, compared with 32 percent of the wealthy. On each of these issues, the opinions of the very
rich are consistent with their interests – but can also be justified by economism.”

“Economism ignores these uncooperative facts and assumes the necessary assumptions, reducing all
real-world questions to simple models and answering them in the same terms. In this sense, economism
is like an ideology.”

“The common justification for great disparities of wealth is no longer that the social hierarchy was
dictated by God (divine right) or that the survival of the fittest is required for the progress of the species
(Social Darwinism). Instead, inequality is necessary, even celebrated, because it is the natural outcome
of an economic system that provides the greatest good to the greatest number (economism).”

“When deployed as a defense of the existing social order, economism shares with Leibnizian Optimism
and Social Darwinism the conclusion that we must accept the world as it is, because our attempts to
make it better are domed to fail.”

“Economism, however, is not a fully fledged political ideology like communism or nationalism.
Economism provides a vocabulary for explaining the world, but it lacks a comprehensive doctrine, a
political program, and even self-professed adherents. People claim to understand economics, but no one
claims to believe in economism. Instead, it functions as an unspoken worldview: a framework that
people use for interpreting social reality, a style of thinking that shapes, consciously or unconsciously,
their values and preferences.
“The fact that economism is NOT a recognized ideology is one source of its influence. An
ideology like liberalism or conservatism is easily identified as a set of value judgments that you can
agree or disagree with. If you believe that people of the same sex should be able to get married, it's
easy to write off someone who says that marriage should be reserved for the union of a man and a
woman. You just don't share the same values. But even if you believe that everyone should have access
to health care, it's hard to write off someone who explains, using the concepts of supply and demand,
that universal coverage will lead to excess consumption. You either have to find a flaw in her
economic argument, or you have to come up with a reason why economics is not the appropriate
way to approach this issue.”

“Economism is also influential because of its seductive elegance and explanatory power. It presents a
model of the world in which policy outcomes are determined by theoretical axioms as inevitably as
mathematical proofs flow from their assumptions.”

“Economism presents a clean, uncluttered picture of the world stripped to its bare essentials,
which can be communicated quickly and easily, dispensing with messy and uncooperative facts. If
you are trying to understand the world, this is a major failing. If you are trying to win a debate, it
is a huge benefit.”