Inefficient Assumptions

Maxine Udall is my favorite economics writer these days, hands down. Her latest post talks about one subject that often confounds me: how can so many people assume that government is the main source of all economic problems? How do so many economists explain away our current economic issues as the result of government intervention, while dismissing the culpability of the private sector.

In some circles, while the government is the source of all evil, the private sector, led by that wonderfully benevolent invisible hand, is almost angelic. I have a really difficult time with analytical frameworks that result in automatic responses, period. For example, some neo-marxists will tell you, almost invariably, that the source of all of our problems is capitalism. Never mind the various contexts in which capitalism exists, or the various forms that it takes, or the multitude of ways in which capitalism plays out (positive and negative)--the problem, in the eyes of some, is always "capitalism". Ok, great. For me this kind of thinking is insufficient. And it's cut from the same cloth as the free-market ideologists who always frame "the state" or "government" as the main culprit in almost any economic disaster.

Udall consistently argues, instead, that the true problem that we need to address is the concentration of power--no matter where it exists (government or private sector). Rather than focusing on the same old ideological responses, maybe we should consider how power, corruption, and coercion can infiltrate many different economic and political systems. Read this:

Regular readers know that one recurring theme in this blog is that concentrated economic and political power in the private sector is as much a "problem" as an ineffective, inefficient guvment especially one that has been deprived of the funds needed to regulate a complex capitalist society based on commercial exchange and characterized in some sectors (like health and finance) by several types of market failure. Regular readers also know that as someone who grew up in a private sector family business, I expect private sector employees and their managers to behave better than caricatures of mindless guvmint bureaucrats that populate cautionary tales about totalitarian guvmints.

Read the rest here. Udall's discussions over on her site illustrate quite well why economics is a social science. The "market" is not some magical, predictable force that has a mind of its own--it's populated and shaped by humans with a varying degree of ethical constraints, desires, and motivations. That means that any economic analysis is going to have to take account of political factors, one way or another. Some economic and social theorists attribute certain predictable traits to particular systems or institutions--"capitalism" and "socialism" being two of the main terms that often get completely reduced to useless ideological caricatures. And while the anti-capitalists and the anti-socialists keep yelling at one another from their respective sides, power continues to accumulate and be deployed in ways that cut across these ridiculously simple divisions.

Maxine Udall: Beach Houses and Health Care

I think that Maxine Udall is my favorite economics blogger. Every time I check her site there is another great post that gets me thinking about economics, and then how that relates to anthropology and all of the issues that I focus on. Here is a key quote from a new post about those wonderful folks who equate health care with every other good and service (like a nice beach house):

It's more likely that someone somewhere said that "free markets" make everyone better off, but didn't bother to explain that markets fail for a variety of reasons that are rampant in health care. Believers in beach house-health care equivalence are really just trying to make everyone better off. Someone somewhere said that people at the top are more productive and therefore deserve more. Believers in beach house-health care equivalence are often at the top, they know in their hearts that they are way more productive, so it's obvious that this is true and fair. Someone somewhere told them about moral hazard and unanticipated side-effects. As a result, believers in beach house-health care equivalence have developed a morbid terror that someone somewhere will free ride or, worse, distort resources away from the beach houses that would otherwise be built.

Read the rest here.

Another reaction to the MARXISTS

Here's the thing: I understand the fact that people all have their particular political and ideological positions. I get that. But what I don't understand is why people react so strongly to information when they THINK it's coming from their supposed ideological enemies. To me, it makes sense to look at critiques from all sides of the spectrum, regardless of what political, social, academic, or ideological position it comes from. When it comes to economics, this kind of thing is really common. And one of the catch words that will strike indignant fear in the minds of many a "free-market capitalist" is "MARX."

So, just to keep everyone up to speed. On July first I wrote about the animated video in which David Harvey talks about the "Crisis of Capitalism." That video was all over the place, and I think I saw a version of it on all of my favorite sites--Savage Minds, Sociological Images, and Maxine Udall (girl economist). In fact, Maxine wrote about the video on July 11, and I wrote about what she wrote about it--if that makes sense. Here is that post.

And here we go again:

Here is a critique of "the radical sociologist David Harvey" by some guy named Lee Doren. Doren works for the Competitive Enterprise Institute, which is geared toward protecting "Free Markets and Limited Government." It says so right on the about page. If you want to know more about Doren, check out his bio.

Doren, who is clearly not impressed with THE MARXIST...er, I mean David Harvey, takes issue with the basic argument that Harvey puts forth. I mean, what sense could some marxist make anyway? Basically, Doren argues that nobody has to listen to a critique that comes from "marxian theory," because, it was like, well, disproved and nobody takes it seriously. That's Doren's opening salvo, and it's a beauty. Why look at information when Milton Friedman said it was nonsense? Wasn't old Milt always right? In other news, let's review a quote about this video by the ECONOMIST Maxine Udall (I already linked to this above):

"This video is an excellent description of the problem."

But there is no reason to listen or pay attention, because Lee Doren said so. Anyway, Doren argues that he will disprove Harvey's ideas using "objective census data." It's all very scientific and dramatic. He even throws in some wonderful personal views along the way.

The real meat of the clash between these two minds begins at about 4:35 in the video. Harvey argues that the immense power of finance capital is the root of the whole problem. How did this come to be? Harvey argues that there has been a period of "wage repression" since the 1970s, in which wages have "remained stagnant" for an extended period. The stagnant wages created a problem with effective demand, and this, Harvey argues, is what opened the flood gate for massive credit debt (and the wonderful housing market of 2008).

Doren stands his ground here. He claims that Harvey has "based his entire theory on the fact that wages have been stagnant." And this is where Doren starts to get a little too excited, awaiting his chance to appeal to some good old fashioned objective statistical data. Doren exclaims, "if wages aren't stagnant his entire theory falls over like a house of cards." And then he takes off on an incredibly high tech journey* to the online US Census data, where he craftily finds his way to the page that lists all of the information about income.

And the crux of Doren's amazing argument is that if you look at the data on per capita income, the results are shocking. In 1967 Americans had a per capita income of $13,888. In 2008, the per capita income almost doubled, reaching $26,964!!! And David Harvey said that wages remained stagnant? That silly marxist! Doren does acknowledge that household incomes remained stagnant over that time period, but argues that individual income is where the truth of the matter lies. Why? Because, the average household size dropped during that time (2.89 in 1975 to 2.57 in 2008), and Thomas Sowell said that people only use household income when they're trying to make a situation look bad. Sowell does make some reasonable points about the limits of statistical data, and he does make a good point about some of the issues with household data and stats. Duly noted. But Doren uses Sowell to sidestep one very critical issue: income inequality.

Yes, per capita income went up from 1967 to 2008. But what is per capita income? It's an average. It's the total personal income divided by the total population. It is a number that tells you how much each citizen WOULD get IF all income was evenly distributed. Great. So what's wrong with using per capita income to critique David Harvey's analysis? Well, the per capita stat tells us nothing about who realized the gains in overall income during these years. And this is why per capita income can be a misleading statistic--the numbers can easily be skewed if there is any outlying data. For that reason, median income is a much better stat to look at. If you look at the same US Census site, you will see that the median income in 1974 was $21,008. By 1994--twenty years later--that amount rose to $22, 904 (that's only a 9% change). In 2008 it was $26,513. So what does that tell us? It tells us that while the overall income increased during this time period, those increases were not spread out evenly among the population. This is where stats can be misused or misunderstood quite easily. Overall, Doren's argument is both intellectually lazy and shortsighted. He should have taken the time to look more closely at the rest of the stats, but I think that he was so exasperated by Harvey's professed marxist analysis that he lost his nerve. Or maybe I am being too generous. The point: don't just overreact and criticize information based upon your personal political beliefs.

In the end, Harvey's argument was that wages remained stagnant, and they have--for a large portion of the population. Up through the mid 1990s they were REALLY stagnant before there were some increases. From that point, Harvey then proceeds to explain how credit debt became a major issue, and so on. But these are all details. Doren was overzealous on numerous counts, one of them being the idea that he could simply discount everything that Harvey is talking about with ONE STATISTICAL FIGURE. Doren was wrong about that, and he missed the whole point of actually having an open, critical debate about our current economic system. In my view, this isn't about ideology. It's about remaining open to ideas, and it's about finding ways to understand the world around us. Ultimately, it's about finding ways to improve upon our situation--at least I hope so. And that's why it's imperative to assess as much information as we can, and to be open to all kinds of ideas and perspectives, despite what we all THINK we know.

That's the end of my rant for the day.


*Sarcasm noted.

UPDATE: Here is a relevant little quote from Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco. It's from November 6, 2006:

"As Figure 1 shows, from 1973 to 2005, real hourly wages of those in the 90th percentile—where most people have college or advanced degrees—rose by 30 percent or more. As I will discuss later, among this top 10 percent, the growth was heavily concentrated at the very tip of the top, that is, the top 1 percent. This includes the people who earn the very highest salaries in the U.S. economy, like sports and entertainment stars, investment bankers and venture capitalists, corporate attorneys, and CEOs. In contrast, at the 50th percentile and below—where many people have at most a high school diploma—real wages rose by only 5 to 10 percent."

And here is the figure that she is referring to:


UPDATE II (7/24/10): Here is another little bit of information that disproves what Mr Doren is trying to argue. On table B-47 of the President's Economic Report (which Doren cited in his video), the average hourly earnings went from $8.21 in 1967 to $7.87 in 1987 to $8.33 in 2007. In fact, for 21 years starting in 1980, wages were BELOW the 1967 $8.21 mark (all in 1982 dollars).