Neo-classical engineering would believe that the perfect bridge is one built under gravity-free conditions. Engineers would strive, always and foremost, to persuade policymakers to move the real world closer to that perfect, gravity-free world.

And what's wrong with that?! (snark)

Posted at June 1, 2007 10:07 AM in response to The Methodology or The People

Or we need to accept -- based on the overwhelming predominance of an oligopolistic economic real world -- that everyone will not play fair, and then regulate the resultant oligopolies intelligently.

To "make sure everyone plays fair" should not be the purpose of government. Instead, governments should regulate the economy in order to produce the best economic outcomes based on the values expressed by the people who elect those governments.

For example, economic security is often associated with economies that are predominantly oligopolies/oligopsonies well-regulated to ameliorate some of the counter-productive features of such economic arrangements. If economic security is a high priority for the citizenry, and I think it is, then economic policy should favor less competitively 'cut-throat' economic arrangements in favor of smartly regulated oligopolies/oligopsonies.

Posted at June 1, 2007 9:59 AM in response to The Methodology or The People

... economic theory works well when choices are available to the participants in the marketplace, and breaks down or at least becomes chaotic in either monopolistic or monopsonic conditions.

(By economic theory, I'll assume you mean neo-classical economic theory.) Monopoly and monopsony (and oligopoly and oligopsony) have long been well-studied 'breakdowns' of the simplistic neo-classical system. Since these phenomena are the norm in nearly all markets, any sincere Econ 1A class would make mono/oli 'breakdowns' a major feature of a slightly less-than-basic economic model. This was in fact the case back in the good ol' days of the 1970s.

You know, funny thing about the real world: when we had the ATT monopoly many hundreds of thousands of communications workers had a strong union, job security, good wages and good pensions. That is no longer the case for most similar workers today. Perhaps we need to re-evaluate monopolies and oligopolies, and how they may be good for the economy if they are properly regulated, compared to the entirely predictable alternatives. And perhaps we should admit that real world motivations will naturally and inevitably create oligopolistic and monopolistic industrial arrangements, and that real world economic policy should think about making the best of such arrangements instead of fighting them and doing great economic damage.

Posted at June 1, 2007 9:47 AM in response to The Methodology or The People

I think you missed my point. The perfectly competitive economic model is absurd, and I think we agree it has very little to do with the real world. So it's frustrating to see you arguing with it, even now. I hate to see your fine mind wasted debating with schizophrenics in an insane asylum, but that is apparently what 'mainstream' neoclassical economics forces people in the field to do, endlessly and without making any headway. It will not advance economic thinking for the real world to 'argue' with the crazy idea of perfectly competitive markets.

(About 'efficient': one person's efficiency is another person's inefficiency. Perhaps you meant 'economic efficiency'.)

I hope you can see in the crazy but very important context of currently dominant economic thinking how the reality of economic history can be helpful. Of course history is not a research laboratory or a mathematical equation, but it is quite clear on the relative prosperity of the pre-and-post Friedman-ite economics eras. I'll take that, and if I were a policymaker or politician I'd favor the policies that 'seemed' to be working during that prosperous era. (These included, importantly, 'infant industries' strategies, 'incomes' policies, and restricting the export of domestic capital).

As you know, the deregulatory argument when Friedman's economic thinking came to dominate policy has been that deregulation makes the economy more competitive, pushes it toward that 'perfect' econ 1A model. Of course this was not true, deregulation often makes the economy less competitive, and frequently such policies advance and entrench 'natural' monopoly and oligopoly. But it is utterly counterproductive to answer that argument with a search for alternative ways to advance us toward the perfect competition model. I think that is where you may be stuck.

Instead of still attempting unrealistically to advance reality toward a simplistic model of unknown real world effects, why not simply advocate economic policy that has seemed -- using real economic measures of real economies -- to work in the past? And if construction of models and theories is your orientation, then form theory around the facts of post-war history rather than the baby talk of Econ 1A.

Posted at June 1, 2007 9:08 AM in response to It's Different for Lefties and Righties

The above is an example of buying into the basic neoclassicist economic politics -- which happens to be the most important political product by far of the hard-line way economics is taught today -- that the purpose of government economic policy is to force the economy to work more and more like the perfect competition model.

That's a very bad idea, as we know from observing those efforts over the last several decades (the late 70s to now) and what the results have been, and then comparing that with the prior era of strong govt intervention in economies (the post-war era up to the early 70s). Economic growth was faster and societies were more egalitarian.

Posted at May 31, 2007 11:42 PM in response to It's Different for Lefties and Righties

I agree, except that for me the most revealing tidbit was when Thomas Palley was classified as a 'heterodox' economist. Since conventional post-Keynesian Thomas Palley is considered heterodox, then simply taking the AFL-CIO perspective on economic policy must make an economist 'heterodox'. (Palley has an excellent critique of Milton Friedman here, by the way.)

Posted at May 30, 2007 9:27 AM in response to The Issues at Hand

In general, the first question, "Why are rich countries rich and why are poor countries poor?", is covered by development economics. The answer has a lot to do with education, and the related issue of health care and life expectancy (collectively called "human capital"), which help with worker productivity. Other factors are the availability of physical capital (think computers, trains, etc.), efficiency of government policies, and (dare I say it) social customs.

This is entirely wrong. With very few exceptions, the countries that are rich today have had strong governments with strong and smart economic development plans. Part of this has always included 'infant industries' approaches, where high-value-added industries are protected from foreign competition until they are ready to compete on a more even playing field. The level of 'general education' is irrelevant, but governments also were able to accelerate economic growth by training potential workers in the skills specifically useful in the emerging industrial economy. Successful development policies also have controlled the flow of capital, not allowing profits produced internally to escape national borders. Finally, successful development has also prioritized incomes policy, moving as many as possible into a prosperous working and middle class, which creates internal demand that itself propels further economic growth.

Note how many of the above routes to success might be seen as doing direct damage to short-term corporate profits. That's another problem successful development must overcome: the counterproductive power of short-term thinking capitalists.

It is important also, to note that most of the countries considered "less developed countries", or LDC's, are in the tropics, which may have to do with an increased propensity of many diseases. Also, governments play a role, as governments which efficiently provide public goods, and tax and subsidize the right industries, will aid the development of their economies.

The above is silly, and note the glaring exception that disproves the 'rule': Singapore.

A good economist to look up is Hernando DeSoto, who argues that property rights are the key to the success of the west. This argument, with a few caveats, is generally persuasive. Probably, the lack of the availability of loans to small producers is also a major contributing factor.

DeSoto's ideas, implemented faithfully in Peru under Fujimori, were a resounding failure, doing nothing for the poor.

Posted at May 30, 2007 9:13 AM in response to A (Strong) Response to Tyler Cowen

This is exactly what is wrong:

we have to deliver the core curriculum from the standard paradigm as defined by the profession...

The profession needs to return to the 'heterodoxy' that prevailed for (apparently only) a short time in the 60s and 70s, when the ideas of Keynes and Friedman were both taught and duked it out in the core introductory courses. The unresolved dilemmas and crises within both approaches -- and the frank recognition by professors of those problems -- were what made studying economics a great and true academic discipline. Those dilemmas were never solved, but somehow Friedman's economics won the academic politics game and has turned econ departments into places most comfortable for economic bible thumpers.

Posted at May 30, 2007 8:35 AM in response to A Role for Heterodox Economists

I believe that what heterodox economists want is an academy where the neo-classical 'text' should not be the 'Bible' of the profession. Because, and this is particularly frustrating, Keynes and his successors showed, not at all very long ago, that the neo-classical model was deeply flawed. In the mid-1970s when I studied economics, the three introductory economics classes began with the classical model but quickly incorporated the Keynesian critique and its revisions to neo-classicism, the continuing unresolved difficulties of Keynesian economics, and Friedman's critique of Keynesianism and the Keynesian response.

Because, back in the 60s the economics profession -- being a real academy and not a bible school at the time -- had accepted into the mainstream conversation Friedman's revival of neo-classicism. (The only people who were upset in those days were the Marxists, who were excluded from the introductory classes and the mainstream of the profession.)

Friedman and his followers (by the early 80s) proceeded to destroy the conversation and much more.

Posted at May 30, 2007 8:18 AM in response to Heterodoxy and diversity

What they want is an academy where the neo-classical 'text' should not be the 'Bible' of the profession. Because, and this is particularly frustrating, Keynes and his successors showed, not at all very long ago, that the neo-classical model was deeply flawed. Nonetheless, back in the 60s the economics profession -- being a real academy and not a bible school at the time -- accepted into the mainstream conversation Friedman's revival of neo-classicism. Friedman's and his followers then proceeded to destroy the conversation and the profession.

Posted at May 30, 2007 8:01 AM in response to The Issues at Hand