I imagine for a tax on businesses be regressive, there’d need to be a negative correlation with after-tax profits. What you refer to is size of business and skill of workforce; not sure how those correlate. Poor, poor employers of unskilled labor, with their significant power to exploit.
As to why I think it might be a good idea, we disagree with your assumptions and model of how the world works, so we don’t agree with you about the effects.
And you especially like how your idea and your worldview result in absolutely no change to your personal situation. Increasing the EITC or whatever, why, that costs you money. Increasing the minimum wage? Why, that’s taking dollars from Ebenezzer Scrooge and depositing them in Tiny Tim’s HCRA.
Yeah, I know regressive wasn’t exactly the right word, but you know what I’m implying. The minimum wage hike’s costs fall unevenly across the economy. And I don’t feel any particular sympathy to employers of unskilled labor, except in that they’re often small businesses like restaurants, and are often not in high-tech industries that are relatively profitable. Any big American company which uses lots of unskilled labor will most likely have off-shored. I’m not saying anything about the employment effects of the minimum wage, just that it’s unfair the way it falls on smaller companies and/or those companies which happen to be in industries which require unskilled labor.
Can you elaborate on which different assumptions you make that imply that the minimum wage is a good and fair poverty reducer? Does it depend on assuming that a minimum wage hike penalizes big exploitative corporations?
If you flip back through the thread I explain it; I have no further details to elaborate.
Well, this is what Gorman himself has to say about the aggregation “problem”:
“The necessary and sufficient condition quoted above is intuitively reasonable. It say, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given.” (Gorman, 1953)
Intuitively reasonable, he says. My intuition says different.
The thing you’re saying about, how even under the restrictions described, the math is still very difficult and complicated… to me, this seems like the reverse of the sensible approach. If you start with the assumption that your task as an economist is to construct a mathematical model of something, and then work out ways to mathematise those parts of economic life that are important, what happens to those concepts which inherently are not amenable to mathematisation? Well, I think one of three things happens: the concept is pushed aside as being unimportant, the concept gets shoehorned into a number which fails to represent it adequately, or you get a kludgy workaround like the preference curve. My “intuition” to use Gorman’s term is that such concepts are best engaged with descriptively until such time as it becomes clear that there actually is a good, clearly satsifactory way to render them mathematically. Historians don’t have mathematical models of what caused the first world war or the collapse of Roman empire; perhaps someday they will, but clearly at the moment the science is not sufficiently developed that it can give its explanations in the language of mathematics. My opinion is that economics is at a similar stage of its development. But it clearly doesn’t see itself that way; instead we have, say, someone like Gary Becker arguing that all behaviour in the family is self-interested and utility-maximising and doing so on the basis of the fact that he can construct a mathematical model which uses those assumptions to predict observed behaviour.
That seems like a good definition of how science should work. You build models to fit the data and then see if they are predictive on other data sets.
IANAE, of course.
I don’t see why. The problem Gorman is discussing is whether or not it’s possible to write total demand for something as a function of its price and the total income of consumers. Suppose for simplicity there’s just two consumers, and they have both have incomes of $50. Suppose we take $10 from consumer 1 and give $10 to consumer 2, which doesn’t change their total income. Unless it happens to be the case that the changes in the consumers’ two demands exactly cancel out – say, 1 wanted to buy three more units after the income redistribution and 2 three less – total demand changes when we redistribute income, holding total income constant. If total demand changes when the distribution of income changes, then we cannot write total demand as a function of total income, that function doesn’t exist. Perhaps you misread Gorman’s sentence as claiming that it is “intuitively reasonable” to hold that this condition holds in the real world; what he means is that the reason why this condition must hold for this form of market demand to exist is intuitive, to an economist anyways.
Notice this is only an issue if we want to write market demand as a function of total income. If instead we write market demand as a function of each individual’s income, there isn’t any problem. All throughout science, from particle physics all the way up to the study of society, such aggregation issues pose problems.
The thing you’re saying about, how even under the restrictions described, the math is still very difficult and complicated… to me, this seems like the reverse of the sensible approach.
Yet that’s the approach taken by every quantitative discipline. Economics seeks to understand relationships, and mathematics is simply a language designed to express such relationships in a very precise manner. Simply describing events, as you would prefer, would not help us understand how society works or, in particular, how interventions are likely to play out. How would a descriptive approach to economics help us understand the likely effects of increasing the minimum wage, to use the example discussed in this thread?
Consider your examples of the fall of the Roman Empire and the causes of the first World War. There is certainly value to collecting historical evidence documenting these events. But suppose then we ask the more interesting questions: is there something intrinsic to emergent social processes which will tend to cause civilizations to rise and then fall? Under what circumstances are wars likely to break out? We need to understand the underlying processes if we want to design policies which may prevent social collapses and wars. And there is a lot of work in the social sciences related to both these questions; earlier in this thread, for example, you brought up Thomas Schelling, who won the Nobel in large part due to his application of game theoretic methods to the study of warfare. Even historians, who are not exactly known for their mathematical prowess, have cliometrics and cliodynamics.
I think an analogy to evolutionary biology is more apt than analogies to specific historic events. The models and empirical methods used by evolutionary biologists are strikingly similar to those used by economists. And so too are the difficulties. For example, just like full-blown Arrow-Debreu general equilibrium theory has little empirical content, so too the neo-Darwinian synthesis has little empirical content describing patterns of speciation. The analog of the approach you champion is for biologists to retreat and simply document the natural world, to just do taxonomy. That’s not going to get us very far. And much like economics, with our tiny cadre of Post-Autistic ideologically-driven hacks, biology has its own issues with Creationists and their ideologically-driven agenda. Compare the tone and arguments advocated by the position statement of the Discovery Institute with the “Post-Autistic Economics” site.
But it clearly doesn’t see itself that way; instead we have, say, someone like Gary Becker arguing that all behaviour in the family is self-interested and utility-maximising and doing so on the basis of the fact that he can construct a mathematical model which uses those assumptions to predict observed behaviour.
Your premise is simply wrong. In Becker’s work on the family people behave altruistically towards family members. One of the goals we humans have is making our family members and other loved ones better off, and, as I explained above, the economist’s standard behavioral assumption is that human behavior is goal-directed. There is some interesting work spanning biology, evolutionary psychology, and economics trying to explain why we have those altruistic motives towards family members in evolutionary terms. That sort of work wouldn’t be possible if economists simply described these sorts of relationships and didn’t attempt to explain them.
There’s an interesting discussion here by various prominent economic types about this article on heterodox economics.
This bit by Matthew Yglesias summarizes my thinking on the whole thing.
Various heterodox sorts cast doubt on various specific contentions of the neoclassical paradigm into question but, as Hayes documents, the neoclassical paradigm is perfectly willing to incorporate such things into the doctrine when they prove convincing over time. What heterodox economists are really challenging isn’t neoclassical economics but the political behavior of neoclassical economists.
The recent Alan Blinder fracas is a case in point. He didn’t call any of the standard neoliberal case for free trade into question, and, indeed, didn’t argue against free trade at all. He just said something that he thought would be helpful in spurring the creation of the sort of social democratic society with an open market that he favors, while many economists saw his statements as giving aide and comfort to people who have a political agenda (blocking new trade agreements) that they don’t like. Even people who challenge free trade orthodoxy more directly – Dean Baker, say, or the guys who write EPI’s stuff about why we shouldn’t sign new trade agreements unless they have much tougher labor rules – aren’t challenging the economic models underlying the case for free trade. They’re having a political disagreement about the desirability of, say, passing CAFTA that has basically nothing to do with any deep disagreements about economic theory.
I reckon he’s talking about this article from Alan Blinder. Blinder’s article sounds reasonable at first to me, but I think it’s a bit strange to tie improvements to the social safety net so strongly to off-shoring. Even if no jobs left the U.S., there will still be continuing labor upheaval as technology destroys and creates different occupations at an increasing rate. If off-shoring causes tens of millions of Americans to lose their jobs and a lot of them can’t on their own acquire training in other fields, then sure, there’s an argument for some kind of government subsidy for mid-life education. I’m guessing that (some) on-line degrees will eventually start to carry a lot of weight though, and that people will see the writing on the wall and move into hotter fields when their job is threatened. Not a piece of cake for blue-collar workers who were poorly educated in the first place, admittedly.
And I’ve been hoping for a free trade thread to emerge because I’ve been thinking about these kind of free trade issues a lot lately. My subjective impression is that there are a lot of people who are staunchly against free trade in and of itself, who don’t believe it is a net creator of wealth in the world, or that the benefits accrue largely to faceless corporations that they despise. Many free-market proponents (I’m including myself here) disagree with that view so strongly that I can imagine we may dismiss other arguments out of hand. For instance, I can understand the viewpoint that trading with dictatorships in some way legitimizes them, and raises issues with labor and environmental standards since the workers are powerless to vote for higher standards in their country. My gut feeling is that a political revolution in China is more likely to happen the more it trades with other countries and is exposed to the political freedom that most of its trading partners have, but it’s definitely an issue worthy of debate.
I oppose so-called “free trade” agreements because the US only abides by them when it’s in their interest to do so, and being non-American that’s a net loss to me.
I also think it benefits corporations disproportionately because capital is more mobile than labour.
There appear to be (at least) two issues conflated here: one is what “heterodox” economists do, and the other is how economists react to public statements which are inconsistent with mainstream thinking.
Heterodox economics does quite clearly spend most of its time flinging faeces at mainstream approaches. They are really quite explicitly challenging mainstream economics (which hasn’t been adequately described as “neoclassical economics” for about fifty years). And they are mostly spouting nonsense. Contrast Tyler Cowan’s comments—similar to mine above—with those of David Ruccio. Ruccio writes papers with titles like, “Toward an Anthropology of Class Discourses” and “Postmodernism, Marxism, and the Critique of Modern Economic Thought.” These pieces do not appear in major journals, which oddly tend to focus on minutia such as theory and evidence regarding social phenomena rather than the postmodern musings of aging Marxists. Ruccio, though, is quite thoroughly convinced that the rejections he receives on his work at major mainstream journals are evidence that there is a conspiracy to suppress this sort of work. It doesn’t seem to occur to him that an alternate theory may explain the evidence better: his work is of low quality and of little interest to the vast majority of his colleagues. Mainstream work which makes actual but minor contributions to knowledge, as opposed to essays about postmodern hegemony, are also rejected at high rates at mainstream journals.
The second issue is how controversial public statements are discussed within the profession. Contra Yglesias, I don’t see how this issue has anything to do with “heterodox” economics. The examples given are statements by David Card and Alan Blinder. Card is at Berkeley and edits the American Economic Review, the most prestigious mainstream journal. Blinder is at Princeton and is former editor of leading mainstream journals such as Journal of Public Economics and Journal of Monetary Economics. These guys are as mainstream as it gets. I would, perhaps too charitably, interpret criticism by other economists of what they tell the public as criticism of remarks which are likely to misinterpreted by non-economists. In any case, this sort of discussion—between mainstream economists—doesn’t have anything to do with the self-proclaimed “heterodox.”
Sure, the post-modern literary theory approach doesn’t appear to have much to it. By contrast, I’d say reswitching and the apparently meaningless nature of capital productivity numbers (I think Robert Vienneau’s blog is very interesting) are rather plausible, to pick a couple, and the profession apparently completely ignores them.
Yglesias is talking how the profession seems far too willing to chuck overboard any concern for detail or accuracy when it comes to political topics. Restrictions on trade are always bad, everywhere, and you’re betraying the profession if you disagree.
Reswitching is well-known in subliteratures in which it’s important (like accounting). More generally, the problem that macroeconomic production functions exist only under restrictive assumptions is very well-known. This is just another example of the aggregation problems to which I earlier referred, which are particularly difficult in macroeconomics for obvious reasons. If the tiny group of hacks still up-in-arms about this issue had anything useful to offer, one would think they would have done so in the fifty years since this issue was a topic of debate in the literature. In the meantime, horrible mainstream economists have revolutionized the discipline, and the “heterodox” have done nothing but whine about the realism of assumptions and about their inexplicable inability to publish their thoughts on postmodernism in the American Economic Review.
Jason, I kid you not when I say these guys really are useless hacks. Particularly some guy’s blog—some guy who “studies economics as a hobby” and includes the brilliant economist-critic and stockbroker Daniel Davies as a favored link—which is possibly not the best the source of information on the state of economic research. If you want to discuss economics, I have the wacky idea you should actually read economics. If you’re only going to read about economics, then why not read good meta-discussion instead of the blatherings of amateur cranks? The Economist’s Voice is a decent online non-refereed journal (which often contains all sorts of juicy criticism of economists!), and the Journal of Economic Perspectives is a good source for discussion of current research in economics written for a lay audience.
The Economist’s Voice is on my reading list, it’s great.
You wouldn’t know this from reading the WSJ when they talk about productivity and include quotes from economists on the subject, or when economists start giving policy advice. All I’m saying.
What’s wrong with Davies?
There’s no reason people talking about productivity in the WSJ or elsewhere, or economists giving policy advice, should even consider, much less discuss, reswitching. There’s a reason this issue is heralded as extremely important among a tiny group of ideologically-charged hacks and usually ignored by everyone else.
Davies, you mean the guy you apparently forget quoting thus (to insult me for no apparent reason), followed up by me looking up who this genius is, findings described here? Honestly, Jason, you do have quite a talent for finding the lousiest commentators on economics on the internets. I’m sure you could find lots of MBAs and people who “study biology as a hobby” who would similarly explain that biologists are morons who ignore fundamental problems with this whole “evolution” nonsense.
Whenever you give policy advice, it’s very important to reiterate the limitations and assumptions of any model, otherwise disastrous things can happen. If Jason is correct, are you saying that all policy makers (who take advice from economists) are so well aware of these assumptions and their ramifications that when economists are advising them, they don’t need to bring them up?
Understanding the “limitations and assumptions of any model” requires understanding the modelling approach at a very deep level, an understanding which policy makers don’t typically have. Certainly, one shouldn’t overemphasize how precise some result is, but neither would reiterating a laundry list of technical assumptions help any non-specialist understand the ideas underlying the advice. All models in all sciences are built on assumptions which often appear strange to laymen. An epidemiologist giving advice on how to contain a flu epidemic wouldn’t, and shouldn’t, note that the model on which he’s basing his advice assumes an uncountably infinite population of randomly mixing ageless people who die according to a Poisson process (these are common assumptions in mathematical epidemiology). The advice is based on what the guy learns about the world from the model combined with empirical evidence, not the technical assumptions underpinning the mathematics. And the same is true for economics. The particular issue to which Jason refers isn’t even an important caveat to standard results from basic models; it’s usually something of no importance which can be completely ignored.
shrugs Ok.
There’s a bit of discussion on Marginal Revolution right now about the “heterodox” and the CCC (Jason’s “interesting” topic above). In the interest of following Jason’s standards for authoritative references, I’ll quote this,
So to get this right, Robert Vienneau is an idiot because he links to d-squared, who you say is an idiot because 1) is mean to economists in blog comment and 2) he gets some econometrics wrong in another post.
Therefore, Brad Delong and Arnold Kling are also idiots, because they regularly links to Davies and has interesting discussions with him. Or is there some exemption for economists who declare themselves mainstream? I don’t get your evaluation process here.
Well if you assume the detail is irrelelvant of course it doesn’t matter. My point is I really do not understand why that is assumed if it’s such a known issue that aggregation is tricky. To an outsider it looks like “mainstream economics” ignores quite a bit of important cavaets when its shilling policies to outsiders.