Questions for Economists

I haven't updated my blog for a while, but I am in the process of writing another book review. This time it will be two books, both related in some way to economics. Before that post is ready, I thought that it would be cool in the meantime to post a "list of questions for economists", based on a book by Rod Hill and Tony Myatt called The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics (Zed Books, 2010).

The purpose of the book is to challenge the standard, conventional treatment of microeconomics of a typical undergrad textbook. It is not against mainstream economics, but against mainstream textbook economics. According to the authors, the problem with the standard text is that it obscures the most important value judgments in economics and pretends to objectivity. Hill and Myatt also criticize the world-view of market fundamentalism assumed by most introductory textbooks. Throughout the book, the authors pose "questions for your professor", which are meant to "help stoke the fires of revolution" and "bring a deeper understanding of economics into the classroom" (p. 2).

In this post, I collect these "questions for your professor" in one place.

***

What is economics? Where you start influences where you go

1. Keynes emphasized the importance of animal spirits -- waves of optimism and pessimism. If the economic actors in microeconomics were as Keynes envisaged them, would competitive markets still be efficient?
2. Would there be an opportunity cost to putting people back to work (and producing more goods) even in a deep recession? If not, then does scarcity depend on full employment?
3. Since it is our friendships and deep connections with others which give our lives meaning, why does cost-benefit analysis always give a zero value to community ties?
4. What the biggest corporations need in environmental policy, or public works, or emergency financial support, they usually get. But textbooks emphasize demand and supply, which omits the power of large corporations. Doesn't this stop us from seeing how we are really governed? Aren't textbooks part of the problem?
5. Aren't there good reasons to think that equity might enhance efficiency, for example, improved trust, less crime and violence, less waste of human potential, better health, better governance? Why does the text mention only how efficiency might be reduced?
6. Behavioral economists have shown that financial incentives can crowd out altruistic behavior, and produce perverse results (examples: blood donors, late fines at day care centers). How do we know when to use financial incentives, and when not to?

Introducing economic models

1. In this course, are we going to decide which models to use by the relative accuracy of their predictions?
2. How can we have confidence in econometric test results when economists can't even replicate each other's results [see Dewald et al. (1986); McCullough and Vinod (2003); McCullough et al. (2006)]?
3. Since any negative result could always be blamed on the way a hypothesis was framed, can a hypothesis ever be categorically rejected?
4. If we can't rely on econometrics, how can we determine which hypotheses are right and which are wrong?
5. It is generally accepted that all paradigms reflect a particular world-view or ideological perspective. What is the ideological perspective of neoclassical economics?
6. (a) How would we test the theory of comparative advantage? (b) Do the mutual gains from trade depend on resources from the import-competing sector moving into the export sector? What would happen if they just remained unemployed? (c) Didn't the United States, Canada and Germany industrialize behind high tariff walls? Isn't it a little hypocritical to now oppose other countries doing the same? (d) Must the long-run gains from all forms of international trade more than offset the losses? Paul Samuelson recently described this view as a "popular polemical untruth". Why?

How markets work (in an imaginary world)

1. If an industry is not perfectly competitive, can we still draw the industry supply curve? (Right answer: No.)
2. (a) In the demand and supply model no one is a price-setter. So, who determines what the price will be? (b) Most firms in the real world set their own prices; does the model apply to them?
3. Does the empirical evidence support the predictions of the supply and demand framework concerning the effects of minimum wages? (Right answer: It's very mixed.)
4. Would rent controls necessarily cause shortages if the rental housing market were only imperfectly competitive? (Right answer: No.)
5. Can the demand and supply model predict the incidence of taxation in imperfectly competitive markets?
6. If price ceilings were low enough, would they cause shortages in non-competitive markets too? (Answer: Yes.) So, if price ceilings caused shortages in the Second World War, that can't be taken as empirical support for the demand and supply model, can it?
7. The demand and supply model suggests that suppliers will increase supply when binding price floors are imposed, despite observable surpluses. Isn't this irrational?
8. If everyone is a price-taker in the competitive demand and supply model, who makes prices fall when there is a surplus?
9. What's your take on Sraffa's (1926) critique of the competitive model?
10. If markets have multiple equilibria, are some more desirable than others? Is there a role for government in attaining the more desirable ones?
11. Changes in expectations about future prices shift both the demand and supply curves. But then what's efficient about prices being at whatever level we expect them to be?
12. The world price of oil hit an all-time high of $147 in July 2008. Many believed that this was in part driven by speculators. How does speculation fit into the demand and supply model?
13. Is the legal framework within which markets operate important in determining the efficiency of markets? Is this ever going to be discussed?

People as consumers

1. How do we measure consumer surplus if advertising and marketing change people's preferences? Does it matter if they buy things they would not want with perfect information?
2. Isn't incomplete and asymmetric information an important problem for consumers? Does the default assumption in the textbook of complete and perfect information divert attention away from these problems? If so, in whose interest?
3. What does the evidence say about whether economic growth and higher average incomes in a country increases feelings of well-being, on average?

The firm

1. Why does the text not refer to evidence about the costs of actual firms? Is there evidence that such firms experience diminishing marginal returns? Is there evidence that actual firms experience decreasing returns to scale?
2. In the (textbook) "equilibrium", if the competitive firm increased its price a bit, why would it lose all its customers? Those customers couldn't buy from other firms since they already produce their profit-maximizing output.
3. If firms can make investments to change public policy to increase their profits, why does the text not discuss this? Where does the text discuss the connection between economic power and political power? If it doesn't, is it sweeping the reality of corporate power under the rug, and in whose interest?
4. Why does the textbook suppose that democracy must end at the workplace door? In whose interest is it that economic democracy remain off the agenda?

Market structure and efficiency -- or why perfect competition isn't so perfect after all

1. If part of the population of a country were starving because they had too little income to buy food (perhaps bad weather destroyed their harvest), would it be inefficient to subsidize their purchases of rice? (The right answer is "yes": allocative efficiency means rice goes to those who are willing to pay the most for it.)
2. Could one regard a monopoly as a reward for successful innovation -- a carrot that promotes innovation?
3. Are firms that possess some monopoly power more likely to develop more efficient techniques over time than competitive firms?
4. Might regulations that promote competition (and hence static efficiency) harm those companies doing most of the technological innovation (and hence harm dynamic efficiency)?
5. I read that the theory of second best suggests that perfect competition is of little use as an ideal benchmark to guide government regulation. Do you agree?
6. With regard to the deadweight loss supposedly associated with monopoly, is there either evidence or theory to suggest the monopolist would have the same demand and the same costs as the perfectly competitive industry with which it is compared?
7. For thirty years (from the mid-1950s to the mid-1980s) economists attempted to estimate the deadweight loss associated with monopoly power. What did they conclude?
8. Is it true that the legal and regulatory system within which markets function is important in determining whether markets work efficiently? Do you think we are neglecting this topic?

Externalities and the ubiquity of market failure

1. Doesn't the "biggest market failure the world has seen" (as Professor Stern puts it) deserve more than a passing mention towards the end of the textbook?
2. Do consumption externalities exist? If so, why doesn't the textbook mention them?
3. Do health and safety risks to workers in the workplace constitute an external cost of production?
4. If externalities are really pervasive and important, why doesn't the textbook integrate them throughout the book, rather than leaving them to a chapter towards the end?

The marginal productivity theory of income distribution -- or you're worth what you can get

1. Does economics support the view that those who receive the greatest rewards are those who have made the greatest contribution? What contribution does the ownership of land or capital make?
2. If increasing returns are pervasive in the modern economy, could every factor earn its marginal product? Or would income shares more than exhaust total output?
3. What's your take on the Cambridge capital controversy? I hear the English theorists won the debate, but lost the war...
4. Does the marginal productivity theory say that workers will receive their actual marginal product at every point in time, or their average marginal product over a longer period? Or will individuals receive the average marginal product of the group to which they belong?
5. How important are "fairness" and "status" in determining a firm's wage structure?
6. Is it true that if relative position is important, even perfectly competitive markets lead to inefficient outcomes? (Right answer: Yes!)
7. The competitive labor market model predicts that if a firm reduces its wage by one cent below the equilibrium, its entire workforce will quit. Why don't we test this prediction?
8. If it is costly for workers to move between jobs, could even small firms have some degree of monopsony power?
9. Executive pay was about forty times average wages in the United States for forty years. But around 1985 it increased, and it is now around one hundred times average wages. Could you explain why?

Government, taxation and the (re)distribution of income: is a just society just too expensive?

1. If poverty is defined with respect to the income that others have, this indicates that well-being is determined by relative income, not just a person's own income in isolation. Shouldn't this idea and its implications be mentioned elsewhere in the text?
2. Why does the text give so little attention to economic inequality? Does that reflect a value judgment that it's not very important?
3. If a policy increases the incomes of the rich without decreasing any other people's incomes, would that be a desirable policy? What does the text say about such policies?
4. What is the evidence for a significant equity-efficiency trade-off? If there is a significant trade-off, why haven't the high-tax welfare states in Europe experienced low growth and low average living standards compared with lower-tax countries?
5. If "social injustice is killing people on a grand scale", as the World Health Organization's Commission on the Social Determinants of Health claims, why is doing something about this not a major theme in an introductory economics course?

Trade and globalization without the rose-tinted glasses

1. Why do we just compare the equilibrium with the tariff with the equilibrium without it? Are we forgetting the costs of getting from one to the other?
2. When some people gain and some lose following some policy change, how do economists say whether society as a whole is better off or worse off? Is it sufficient to have net gains so that total incomes go up?
3. The Ricardian model in the text does not allow capital or labor to move internationally. What if capital moves to "offshore" some production. Does this make workers at home worse off?
4. According to the textbook, specialization with free trade results in the most efficient use of the world's resources. Are other, inefficient, outcomes possible?
5. Is trade in toxic waste efficient? Why does it seem to be an unpopular idea?
6. Does the textbook provide any explanation about why "fair trade" products exist?
7. "Free trade" agreements seem to be about a lot more than tariff reduction. They have about as much in common with free trade as pre-nuptial agreements have with free love. Do you agree?
8. Does foreign ownership of firms matter? What does our textbook have to say about this?

***

The Economics Anti-Textbook concludes with a summary of key takeaways: that economics has a normative agenda, that people are not fully rational, that textbooks downplay the goal of equity, that "more stuff" is not necessarily better (vis-à-vis happiness), that economics suffers from methodological problems (like the use of rhetoric), that textbooks overemphasize perfectly competitive markets, that mainstream economists often fail to reflect on their own ideological leanings, that textbook economics presumes that smaller government is better, that textbooks downplay the importance of the legal framework, that textbooks omit the topic of power, that mainstream texts are biased in favor of free trade, that the role of community is often omitted, and that the textbooks downplay the ecological crisis facing our planet.

At this point it may not surprise the reader to know that Hill and Myatt view themselves as "post-Keynesian" and "European-style social democrat". Nevertheless, these questions are important to address for anyone writing an economics textbook.

While this book focuses mainly on matters of microeconomics, the two books I will review in my next post are somewhat more "macro" in nature. Stay tuned.
Added 22 July: The post is now live here.