News for Students of Microeconomics
This page draws your attention to new papers, books and websites about microeconomic subjects. The page is still in its infancy. It will be regularly updated.
Economists are working at “the frontiers of nonsense”. This is what Randall Wray, a professor of economics at the University of Missouri Kansas City, is quoted as saying in a New York Times article of March 4, 2009 by Patricia Cohen: “Ivory Tower Unswayed by Crashing Economy.”
The immunity to reality that is so typical of economists occurred before and after the world-wide crash. Economists did not foresee it, let alone warn against it. And after it had happened, they failed to correct their rigorous laissez-faire recommendations, which had contributed to it. Patricia Cohen says that there is no academic response to the word-wide crisis. “Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country.”
The failures of economists are ascribed by Robert J. Shiller, a Yale economist, to “groupthink”. People tend to agree with the conventional wisdom for fear of being marginalized. Yes, but there are additional reasons. If you have read Chapter 1 about The Paradigm of Economics, you know why it is so difficult to change the conventional wisdom. And remember conspicuous argumentation. And the enormous sunk costs involved; think of the superhuman effort required from all the mainstream professors who have preached and published the mainstream paradigm all their lives.
http://www.nytimes.com/2009/03/05/books/05deba.html?_r=2&sq=ivory%20tower&st=cse&scp=1&pagewanted=all
The homo economicus model is “borderline irrelevant”. Anyway for people “who deal with actual humans in market settings such as advertisers or corporate managers”, writes Jonathan Rowe in “Why Economists Are So Often Wrong”. Rowe thinks the homo economicus model is a major reason why there are so many mistakes in economic theory. This model is unempirical and hypothetical; it has given economists “a hook on which to hang their arcane math” and has turned economics into a science based on “psychology on steroids”. The only people who seem to bear some slight resemblance with homo economicus are economists. Yes, perhaps, remember that students of economics tend to free ride more often than other students and that teachers of economics give less generously to charities than professors of other subjects. (pp. 51-52).
Rowe argues that a very decisive element in human behaviour is completely neglected. “The other side is not the sappy, selfsacrificing altruist that marketophiles posit as the only alternative to their model of human behaviour. Nor is it the grim utilitarian socialist. Rather, it is whatever resides in us that wants to be engaged with and around other people – whether to accomplish a task or just because it is fun.”
http://onthecommons.org/content.php?id=2396
The homo economicus model should be based on systematic but predictable irrationality. This is the theory of a new book on behavioural economics: Dan Ariely: Predictably Irrational: The Hidden Forces That Shape Our Decisions. New York: Harper Collins, 2008. Dan Ariely is a professor at MIT. His book is highly entertaining. His theory relies on evidence from everyday experience plus a combination of well-known and new research findings in behavioural economics.
Like other behavioural economists, Professor Ariely has dealt a fatal blow to the homo economicus model, which mainstream economists will – as usual – ignore and survive.
The Tragedy of the Commons is “a piece of reactionary nonsense” and “a politically useful myth”. This is what Ian Angus says in “The Myth of the Tragedy of the Commons.” Angus analyses an article by Garrett Hardin “The Tragedy of the Commons”, which was published by Science in December 1968. It was the most influential article ever written on the subject.
We have seen earlier that no textbook fails to explain the Tragedy of the Commons. It serves to prove that community ownership is bound to fail and that there is no alternative to private ownership. Hardin claims that community ownership leads invariably to vast inefficiencies and ultimately to ruin. His theories allow economists to make the poor responsible for their poverty and for the exhaustion of natural resources. As they became a paradigm, they served to justify imperialist policies that deprived indigenous peoples of their lands.
I think there are better theoretical and empirical arguments against the parable of the Tragedy of the Commons (cf. pp. 367-369) but nevertheless I found the article by Angus instructive. Have a look at it if you are interested in the subject.
http://www.monthlyreview.org/mrzine/angus250808.html
Three papers about organ trading. This subject is likely to be discussed in any microeconomics principles course. There are supply, demand and price, the three building blocs of the microeconomic model. But there is also repugnance and a great deal of crime – not entirely new experiences for microeconomic agents but normally neglected magnitudes in microeconomic analysis. Here are the papers; all of them are in The Journal of Economic Perspectives, Summer 2007, (21)3.
Gary S. Becker and Julio Jorge Elías. “Introducing Incentives in the Market for Live and Cadaveric Organ Donations.” The authors focus on live rather than cadaveric organ donations. They espouse a free market for organs with payments to organ donors. By using the methods to assess the value of a life which you have encountered in Chapter 17, they assess the value of a kidney at $15,200. At the end of their paper, they brush aside the opposition to the commodification of organs by comparing selling organs with two other practices that are legal in the United States: Getting paid for hosting the eggs of other women and bearing their children and paying market wages to attract army volunteers.
http://home.uchicago.edu/~gbecker/MarketforLiveandCadavericOrganDonations_Becker_Elias.pdf
David H. Howard. “Producing Organ Donors.” The paper describes the present organ donation system in the USA and the presumed-consent system that many European countries have adopted. It discusses methods to increase donations within the current systems such as quality improvements in the work of hospitals and organ procurement organisations, public and professional education and expanding the use of organs from marginal donors (these are old or sick donors). The author criticises several reform proposals and emphasises that, whatever scheme is preferred, all of them require the consent of the deceased person’s family.
http://www.atypon-link.com/AEAP/doi/pdfplus/10.1257/jep.21.3.25?cookieSet=1
Alvin E. Roth. “Repugnance as a Constraint on Markets.” Roth investigates transactions that used to be repugnant or are still repugnant. Using cadavers for anatomical study and charging interest on loans are examples in the first group; horse and dog meat and currency speculation are in the second group. He attributes repugnance to paid organ donations and other commercial transactions to three factors: (1) Monetization. It turns a good deed into a bad one. (2) Coercion. Related donors might act under moral or family pressure. Unrelated donors are likely to be in dire financial need. (3) Slippery slope. Legalising one questionable thing might pave the way for legalising even worse things.
The author emphasises that in-kind exchanges do not arouse repugnant responses. Allowing incompatible patient-donor pairs to exchange kidneys, in-kind exchange would help people who have a willing live donor.
http://kuznets.harvard.edu/~aroth/papers/Repugnance.pdf
Investigation of Wal-Mart. In the Concluding Notes of Chapter 10, I wrote that an investigation of the entire retail sector would be illuminating. After all, interactions on markets, the major subject of microeconomics, take place between consumers and retailers, not between consumers and producers. “The Causes and Consequences of Wal-Mart’s Growth” by Emek Basker deals with Wal-Mart, the world’s biggest retailer and the largest employer in the USA. The paper is in The Journal of Economic Perspectives, Summer 2007, 21(3).
Basker describes the reasons for Wal-Mart’s success – technology and economies of scale and scope – and analyses the firm’s wage policies and treatment of labour, its impact on competitors, suppliers, prices and employment.
http://economics.missouri.edu/working-papers/2006/wp0611_basker.pdf
On Léon Walras. If – and only if – you are interested in Walras’s personality and his conviction of the importance of his work, take a look at a paper describing his attempt to be awarded the Nobel Peace Prize in 1905. Agnar Sandmo. "Retrospectives. Léon Walras and the Nobel Peace Prize". Journal of Economic Perspectives, Fall 2007, 21(4). Walras asked three colleagues to propose him and authored a memorandum to explain that his espousal of free trade was conducive to international peace. Strangely enough, Walras did not deal in any detail with free trade and its advantages in his books.
The Nobel Prize in Economics, for which Walras would no doubt have been a candidate, was awarded for the first time more than half a century after Walras’s death.
By the way, the paper reveals a bizarre theorem espoused by Walras that was completely unknown to me: He advocated the nationalization of all land, which, as Sandmo rightly stresses, might be an incentive for military aggression as a victorious country could easily sequester the entire land of the defeated country in one stroke.
http://bora.nhh.no/bitstream/2330/1575/1/dp2007-11.pdf
Four papers on the US tax system. They are in the Journal of Economic Perspectives, Winter 2007, 21(1).
In Chapter 19, I wrote that economists can no longer ignore tax havens. A paper by Joel Slemrod “Cheating Ourselves: The Economics of Tax Evasion” and the extensive references added to it show that they don't. But as usual, what economists really think and know never makes it into textbooks and seldom into their contributions to policy debates, which invariably centre around the disincentive effects of taxation.
The author estimates tax evasion for all US federal taxes and the individual income tax to stand at approximately 14 percent; for the corporation income tax it is estimated at 17 percent or $30 billion for 2001.
http://www.atypon-link.com/AEAP/doi/pdf/10.1257/jep.21.1.25
“Taxing Consumption and Other Sins” by James R. Hines Jr. shows that, by international standards, US consumption taxes are very low and explains why consumption taxes offer a large number of advantages.
http://www.atypon-link.com/AEAP/doi/pdf/10.1257/jep.21.1.49
“How Progressive is the U.S. Federal Tax System? A Historical and International Perspective” by Thomas Piketty and Emmanuel Saez analyses changes in the US tax system since 1960. The authors’ main conclusions are that the there was a dramatic decline in the tax burden of the top 1 percent of income earners and particularly in the top 0.01 percent of earners, that average federal tax rates for the middle class hardly changed, and that payroll taxes were raised substantially.
http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf
“Tax Reform Unravelling” by Michael J. Graetz deals with three subjects: (1) The paper assesses the much-hailed 1986 tax reform introduced by the Reagan Administration and concludes that it was a failure, (2) it analyses the most important amendments of the Reagan tax law and (3) it proposes to improve the US tax system by introducing a value-added tax. The author states that a VAT in the range of 10 to 14 percent would allow the US to make the first $100,000 of income tax-free and to levy a marginal tax rate of no more than 25 percent on incomes above that level.
http://www.atypon-link.com/AEAP/doi/pdf/10.1257/jep.21.1.69
Why do people work? This question is investigated in “Paying Respect” by Tore Ellingsen and Magnus Johannesson in The Journal of Economic Perspectives, Fall 2007, 21(4).
The authors’ answer: Economists are right to focus on incentives; they are wrong to focus on material incentives alone. A major motive for people to work is the respect they receive in exchange. Employers are advised to pay their employees with a combination of money and respect. The authors provide a great deal of empirical evidence to support this theory.
http://www.atypon-link.com/AEAP/doi/pdf/10.1257/jep.21.4.135
Capitalism requires virtues. In Chapter 18, I wrote that the bourgeois virtues of capital owners used to be seen as a prerequisite of the functioning of capitalist systems. There is a book that postulates that capitalism cannot be sustained without bourgeois virtues. The Bourgeois Virtues: Ethics for an Age of Commerce by Deirdre N. McCloskey. Chicago and London: University of Chicago Press, 2006. The author heavily criticises what she calls Max U (for maximum utility) and urges economists to incorporate the importance of virtues into economic theory.
Somewhat to my surprise, Ms McCloskey argues that the virtues needed in capitalist systems are identical with the seven cardinal virtues of Christianity: Love, hope, faith, wisdom, courage, prudence and temperance.
There is an interesting review of the book in The Journal of Economic Literature, June 2007, Vol. XLV. Its author, Jonathan S. Feinstein, proposes to focus on virtues other than the seven classical ones and suggests ways to incorporate virtues into economic theory.
http://www.jonathanfeinstein.com/text/bookreview-bourgeoisvirtues.pdf