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Occupy market failure

from David Ruccio

With all due respect to Mark Thoma, the introduction of market failures does not mean the teaching of principles of economics is not a problem.* It’s the least mainstream economists can due. But it’s not enough.

The way principles of economics gets taught, at Harvard and at many other schools, is that markets represent the best solution to the problem of scarcity (based on limited means and unlimited desires). But then, after the entire apparatus has been explained, it can be shown that—for a variety of reasons (from negative externalities, such as pollution, to asymmetric information, as one might find in credit markets)—free, unregulated markets might not produce an efficient allocation of resources. A market failure might occur. Therefore, some kind of intervention might be necessary.

That’s it. In the best of circumstances, that’s the end of the story. And so the limits of the mainstream debate are defined: free markets versus regulated markets, the invisible hand and the visible hand. All with the same goal: the efficient allocation of scarce resources.

But that’s not enough for our students. What the market/market failure way of teaching the principles of economics doesn’t allow is that there are other ways of making sense of markets—other economic theories, historically and today—and other ways of allocating goods and services and resources—other economic systems, which may or may not include different kinds of markets.

The principles of economics needs to introduce students to those debates, among and between different theories and different economic systems. That’s why we need to occupy market failure.

* But I do agree wholeheartedly with Thoma on his earlier observation:

The fact that one introductory class at Harvard has this much power to affect the national narrative is part of the problem not the solution. It is yet another reminder of just how concentrated power is in this society, and where it lies. Would a protest at a typical state university have gotten as much publicity? Nope. But when it’s the institution that educates the rich and powerful, suddenly we are supposed to take note. And we do.

  1. December 7, 2011 at 1:52 pm

    As any non-mainstream economist knows, layering all the critiques or part of the critiques of the textbook fairy tale onto the all ready jam packed intro to economics course, makes the classroom a difficult place to navigate. On the one hand, you have all these students reading the text and not comprehending that there is a story larger than any particular graph. On the other hand, you have other students who see a larger picture and wonder why they are being drilled … ad nauseam … in material that is obviously wrong.

    There is, in short, a screaming need for a whole new approach to teaching introductory economics. One that does not take Samuelson as the template.

    • Peter Radford
      December 7, 2011 at 10:27 pm

      Time for a new book?

  2. December 7, 2011 at 3:20 pm

    Great comment Susan.

    Unfortunately I have been arguing for several decades that Samuelson never undestood Keynes [ as he has admitted and I quote in my book] and that he simply assumed it was a Walrasian system with sticky wages and prices. Why? Because Samuelson’s doctoral dissertation on the FOUNDATIONS OF ECONOMICS whichwon the Wells Prize was a Walrasian analysis and from then on Samuelson was always considered a savant by his fellow economists.

    Yet he was WRONG about both micro and macroeconomics as I have tried to explain ever since my first major book in the 1960s entitled MONEY AND THE REAL WORLD.

    I don’t think Susan your argument will carry much water with our mainstream colleagues who have a huge human capital investment in Samuelson economics!

    But as I point out in my book THE KEYNES SOLUTION, Samuelson wrote his textbook “lawyer-like” (his words) during the McCarthy witchhunt for radicals in academic economics departments. You should study the history especially the role played by William F. Buckley and Buckley’s book GOD AND MAN AT YALE where Buckeley compains that as an undergraduate at Yale he had to read as communist inspired textbook by a student of Keynes named Lorie Tarshis. The loss of Tarshis textbook sales and his job possibilities were enourmous

    Paul Davidson

  3. Robert R Locke
    December 7, 2011 at 3:50 pm

    The Swedish Economist Gunnar Eliasson in 1998 wrote: “The management teacher as well as the economic theorist needs a realistic model (method) of the firm to support teaching and thinking. Since no realistic theory of dynamic markets exists no good theory of the firm has been created.” Eliasson wished so much to incorporate a theory of dynamic markets into economics that he called together a large group of economists (in Stockholm) in 1998 to put their heads together to come up with something. They came up with precisely nothing. The economists who were there, many from the US, were cynical about the whole business; they knew that economic theory had nothing much to say about dynamic entrepreneurialism and just enjoyed the trip and the good food. This being the case, why are we in the slightest worried about economics as it has come down to us. Forget making it relevant, as everybody says, it isn’t and has no intention to be.
    What do we do? Well, forget economics and look at the real-world and the questions before it. One has to do with efficiency. What is it? This is an old question for business economists. In the 1920s German professors debated it rather extensively. Some, a minority, followed Rieger at the Handelshochschule Nuremberg said that the firm is a money mill—a Geldfabrik – and efficiency is measured in terms of profits (money). But most German business economists thought then that was a very narrow way to define efficiency: efficiency had to mean that the results served the firm as an entity (its sustainability, not just Shareholder value), or even the community (Nicklisch). US proprietary conceptions of the firm have rejected such claims; they cling to the Geldfabrik.
    But the issue is of paramount important today when we think of the financial crisis. Investor capitalism as it has grown up in the US lets outsiders take over firms, even if their purpose is to suck all of the value out of it, leave the firm an indebted candidate for the bankruptcy courts, and steal off with the cash. If the stockholders receive a good payout, then the takeover is deemed a success. But what about the firm and the community? What has economics to say about that. From what I can tell, precious little as a science. They do not know much about how efficiency relates to the constitution of the firm and systems of firm governance. And yet this issue of efficiency is at the heart of the matter today. I’m waiting, since I was in Stockholm in 1998.

    • Peter Radford
      December 7, 2011 at 10:11 pm

      When I re-engaged with economics a few years back one of the first things I did was to buy a micro book. After all, I had read that ‘good’ macro had to be built on what was, presumably, unassailable micro. I bought David Kreps ‘A Course in Microeconomic Theory’. I have never, even after a few attempts, managed to get very far without having a good chuckle at the inanity of it. I especially love the standard conception of a business firm. Armed with my MBA, and having two decades of work experience in business, I tell anyone interested that of all the people on earth least qualified to talk about a firm, economists rank highest. This isn’t a question of mars and Venus, its a question of two totally different galaxies.

      The shame of it is that much of modern business/management theory rests on the ramshackle foundation of orthodox microeconomics. The damage that has wrought in social disruption, poor decision making, and wealth destruction is astounding. Yet it persists.

      As a tour de force of imagination micro is amazing. As a useful tool for understanding anything other than the perfection within that imagined world it is appalling. As far as I can tell it was conceived to make the pieces fit nicely with the worldview that markets are the beginning and end of everything. That this was, and remains, something to prove rather than act as the launching place for enquiry seems miraculously to be omitted in the introduction.

      I spent two decades grappling with incomplete information; uncertainty; path dependence; cognitive limitations; bureaucratic management; and asset allocation methods that were When I re-engaged with economics a few years back one of the first things I did was to buy a micro book. After all, I had read that ‘good’ macro had to be built on what was, presumably, unassailable micro. I bought David Kreps ‘A Course in Microeconomic Theory’. I have never, even after a few attempts, managed to get very far without having a good chuckle at the inanity of it. I especially love the standard conception of a business firm. Armed with my MBA, and having two decades of work experience in business, I tell anyone interested that of all the people on earth least qualified to talk about a firm, economists rank highest. This isn’t a question of mars and Venus, its a question of two totally different galaxies.

      The shame of it is that much of modern business/management theory rests on the ramshackle foundation of orthodox microeconomics. The damage that has wrought in social disruption, poor decision making, and wealth destruction is astounding. Yet it persists.

      As a tour de force of imagination micro is amazing. As a useful tool for understanding anything other than the perfection within that imagined world it is appalling. As far as I can tell it was conceived to make the pieces fit nicely with the worldview that markets are the beginning and end of everything. That this was, and remains, something to prove rather than act as the launching place for enquiry seems miraculously to be omitted in the introduction.

      I spent two decades grappling with incomplete information; uncertainty; path dependence; cognitive limitations; bureaucratic management; and asset allocation methods that were more rule of thumb than scientific. Above all I worked within a centrally planned economy called a business firm, and I learned that management as central planning is essential under such conditions, where their complexity causes markets to fail.

      That micro books continue to peddle nonsense astonishes me. And I feel for the students who try to absorb it whilst also trying to locate its relationship with the world around them. Orthodox economics is teaching the firm is if it were a clockwork device. Students are living the firm as an atomic clock. They can tell the difference. Unfortunately the standard text can’t.

  4. Peter Radford
    December 7, 2011 at 10:25 pm

    In this context let me quote Greg Mankiw from his recent self-defense in the New York Times:

    “If my profession is slanted toward any particular view, I am as guilty as anyone for perpetuating the problem”

    This after describing how he grew up on Samuelson.

    “Yet” he goes on “like most economists, I don’t view the study of economics as laden with ideology”.

    Really?

    This lack of ideology led him to assert, when discussing inequality on NPR:

    “I think the liberal position is to try to address the outcomes through a progressive income tax, and I think the conservative point of view is to try to address the causes. One of the causes is the educational system.”

    This is, apparently non-ideological. Liberals rob the rich. Conservatives try to understand the causes. Liberals are jealous. Conservatives are serious in their scientific efforts to learn.

    I submit that one of the problems within the educational system is Mankiw, his ilk, and their unwillingness to declare their ideological bias.

    But that’s just me.

    • Alice
      December 8, 2011 at 5:16 am

      I agree re Mankiw – his ilk is very much part of the problem.

      The liberal position is the position of the 99% now. The need for a MORE progressive taxation system should be apparent by now. The inequality.

      We have had thirty years experimenting with a low tax on the rich and in “conservative speak” the same wealthy are apparently also the “job creators” and in “conservative views”, the only class who actually “creates jobs.” So we have systematically reduced their taxes and the regulation of their business activities from levels much much higher in history and the only thing that has happened is growing inequality from about the same time (1970s) and now large unemployment and miserable wages that have not had real growth since about that time even though more persons in the average home are working (ref Elizabeth Warren).

      The bubble created by speculators in real estate has inflated house prices beyond people’s abilities to keep a roof over their heads. Americans are not rampant consumers – that is a lie. It is the mortgage eating into their incomes….not clothes, not appliances relative to the 70s and the mortgage is far bigger relatively. Takes Mum and Dad to service it.

      If anyone needs tax relief it is the middle and the poor and it needs to go UP on the wealthy by a lot.

      Enough of Mankiw and his ilk. If liberals seek to rob the rich now…its only because the rich have been robbing every other class for thirty years and its time the rich gave some of it back and actually realised the damage its doing to economies across the globe.

      Its the combined wealth of all that creates jobs. Its the spending of all that creates jobs. Even a tiddly takeaway purchase creates a job for someone. Even getting a man to mow your lawns creates a job.

      Im tired of the “feed the rich” attitude amongst conservatives. Some allowed them to trick us into letting income and wealth trickle up. Many of us have been conned and people like Mankiw are part of the problem. He pushes an ideological barrow – it was his type who have been given the power to run economics departments in many universities across the globe and insist on adherence to neoclassical orthoxy no matter what problems have been slowly emerging in the real world.

      They are so busy creating their internal fairy story – they would know an economic problem if it hit them over the head. The orthodox economists even went as far as dispensing with economic history – so they wouldnt have to learn from their mistakes.

  5. Dave Taylor
    December 8, 2011 at 9:58 am

    Reading all this, I want to say first that economics as it is now taught is not Economics as a whole; that is the economics merely of trade, with all other aspects considered from that point of view.

    What, in my judgement, an introductory course should be based on is a model of an Economy as a whole, wherein trade and its accountancy must have its place, but that subservient to what it is trade in. That is what I have been trying to suggest at #27 and #29 of the thread on “It’s getting real in the Eurozone”.

    My difficulty is that the model is a flow diagram, which I cannot include in a verbal comment. A simplied version of it comprises four economic functions: investment, production, consumption and maintenance/ recycling (which includes health care and education), each related to all the others by monetary and/or real flows represented by lines indicating their paths or channels. This is the macro model; it is turned into a micro one by inserting a market in each path, whereby who buys what from whom (as indicated on till roles) is eventually recorded in the appropriate bank accounts.

    The banks [should] supply money to the system via investment, much as a header tank supplies water to a central heating system when it is cold and saves the overflow when it expands on heating. As of now they first supply a shadow economy of speculative investment in money, [second hand] stocks and shares, insurance, and derivative markets, with real investment receiving only what “trickles down”.

    The big issues which need to be dealt with in an introductory textbook are thus what money is, its non-equivalence to the economic functions it mediates, and the need (or otherwise) for monetary markets or equivalent as [cross-indexing] mechanisms for transmitting money and goods from one functionary to another. That leads to information-based interpretations of the model and deeper study of logical and moral architectures, double loop learning and personality and motivational differences giving substance to specialisation; but the starting point is the circulation of potential information carriers and the need to “recharge batteries”.

    Just as importantly, though, the mathematics taught needs to be that appropriate to circuital flow systems, where units are cyclic groups, quantities are replaced by complex numbers, time by timescales and the geometry is drastically simplified to topology (in which only the order of events and timing of conjunctions matter, cf. rail vs road travel). Since apprentice electricians can cope with this, apprentice economists ought to be able to. Mathematical understanding is helped by studying its development: here, particularly, Heaviside’s development of simple electric circuit theory from Maxwell’s complicated free space differential equations.

    Egmont Kakarot-Handke had it about right on Introductions to Economics: “Scrap the lot and start again”. For reasons that emerge from the above, that doesn’t seem true of the real Economy, but we could well scrap the failure-inducing Wall Street shadow economy and get the banks doing their proper job.

  6. December 8, 2011 at 2:02 pm

    The neoclassicals see, contrive and deductively sculpt or craft their tautological memes and narratives passed off as “theory” or even “axioms” or “laws” Everything tend to the best in what is assumed and crafted to be the best of all worlds. Capitalism, when “unregulated” and free markets are allowed to be free, property rights are defined and protected, assuming zero transactions, information and other costs and asymmetries, becomes an autopoietic (self-creating), sel-organizing, self-stabilizating and equilibrating, self-reproducing at expanding scales system that delivers the greatest goods and services to the greatest number matching their individual preferences if they can afford to indulge them, and, does all of this in the most “efficient” ways as “efficiency” is defined to ensure that only capitalism can promote and realize it.

    Then you get the “isolated” and “outlier” cases of market failure (best corrected by more of the same markets that caused the failure and/or new markets like a new funeral home to handle the deaths from a polluted river by some corporate “person”) oligopoly, monopoly, monopsony, oligopsony, monopolistic competition even… Also designed to show that any market failure resulting from lack of competition may either be necessary (national defense contractors, economies of scale efficencies etc) or not due to imperfect or asymmetrical access to political power, and/or is due to over not under regulation of corporate miscreants.

    It is not just a fantasy play or some outright toadying, sycophancy, and opportunism among some academics teacing and writing textbooks. These superficial memes and dogmatic slogans are passed off a “science”, “established theory and consensus among ‘economists’, they are used to construct, legitimate and impose barbaric policies and covert machinations that cause real harm to real people. No amount of rearanging the deck chairs on this Titanic-like doomed system will save it from the weight of its own internal and defining contractions and features.

    And no amount of Faustian Bargains in Academia will save it or help to replace it. As long as getting hired, tenure or the next promotion in acadmia is job one for most academics, “progressive” or therwise, over telling the truth to power and linking up in concrete ways scientific endeavors that matter to real issues, peoples and struggles, just like the old saying GIGO–garbage in, garbage out.

  7. Alice
    December 9, 2011 at 9:45 am

    Dave

    I appreciate your comments because at least they attempt to move the mathematics of economics into a broader dimension…but seriously whether you add one more variable or ten…it doesnt make it any better “a fit” because for every ten variables economics captures there are still a billion mkissing from the equations which basically renders the entire science, matematically speaking, a fraud.

    Now instead, if the “science of economics” was equipped with the hindsight (and I say hindsight – not foresight because it is notoriously bad at that)

    We may actually get somewhere – but whilever the the profession remains chained to a wheel of mathematics to which it has become enslaved….the real economic problems will pass the profession by unnoticed

    Which makes the profession itself rather irrelevant (a sort of ivory tower enclave who really dont understand the world at all…least of all the morals we need….. and strike me down with lightening for saying so but the subjective…yes subjective….not positive….. and human and literate….. interpretation of ethics…… so desperately needed in this profession).

    You can call it the milk of human kindness and it is badly needed in the economics profession, which has over the past thrity years become a dry, cold self serving narrow instrument for vested interests.

  8. Alice
    December 9, 2011 at 10:02 am

    The trouble with economics and how it is taught conventionally…is because it focuses on trade between two participants, one of whom does something cheaper than the other and vice versa (eg comparative advantage and the gains from trade)

    Yes – that would be in a nice in a world unafflicted by wars, disease, famine, political turmoil, economic turmoil and currency wars, and any other untoward event that affects trade and leaves both parties to this “perfect transaction” going without.

    The problem with economics is it takes a grandiose position but relies too heavily on ceteris paribus (which I read as the excape clause when the theory goes horribly wrong more often tha not…).

    I try so had to tell my students whats wrong with economics..but I really am tired of apologising for woeful ordinary texts that dont challenge any student to think…and here they are thinking all by themselves.

    I am not surprised.

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