I have asked this question many times and it always elicits a chuckle. Clearly if you choose one over the other, you end up dead. And if your body decided that this ongoing struggle between inhaling and exhaling was a problem to solved, you would end up dead. Breathing is not a problem to be solved. It is a polarity to be managed.
Polarity management has a much wider application then biology. It applies to a wide range of features in human systems. Economist John McMillian (Stanford) wrote an insightful book called, “Reinventing the Bazaar: A Natural History of Markets.” McMillian makes the case that the never-ending struggle in political economy has been to find the right mix of centralization and decentralization. If power becomes too centralized, then it will become oppressive and destructive. Yet, without centralized power, local tyrants emerge, injustice proliferates, and warring factions square off, sending society into chaos. In this sense, political economy is a polarity to be managed, not a problem to be solved.
Writing in the Atlantic, Eric Liu makes an important observation (emphasis mine):
"We don’t need fewer arguments today; we need less stupid ones.
The arguments in American politics today are stupid in many ways: They’re stuck in a decaying two-party institutional framework; they fail to challenge foundational assumptions about capitalism or government; they center on symbolic proxy skirmishes instead of naming the underlying change; they focus excessively on style and surface.
Americans can do better. Remember: America doesn’t just have arguments; America is an argument—between Federalist and Anti-Federalist world views, strong national government and local control, liberty and equality, individual rights and collective responsibility, color-blindness and color-consciousness, Pluribus and Unum.
The point of civic life in this country is not to avoid such tensions. Nor is it for one side to achieve “final” victory. It is for us all to wrestle perpetually with these differences, to fashion hybrid solutions that work for the times until they don’t, and then to start again.
"America is an Argument." Bingo! I think you will find the same is true in all human structures, including church and family. Part of what facilitates better discussion and arguments is appreciating that we are often wrestling more with polarities and less with virtue and vice.
Many Americans, especially progressives, are now “socialists.” The rise of Bernie Sanders has had much to do with it. Yet, when I hear them talk, I keep hearing Inigo Montoya, “You keep using that word. I do not think it means what you think it means.”
According to Marxian theory, Socialism is a transitional economic system between capitalism and communism. Capitalism (i.e., private property ownership and the distribution of goods and services through market exchange) will run its course and one day a classless society with no private property will evolve. The workers will hold things in common and goods will be distributed according to need.
Some Marxists believed they could accelerate this evolution through violent revolution and imposition of communist principles. We saw that tactic attempted several times in the last century. Others believed economic evolution should run its course. People could work for greater social justice within the system as they methodically brought every aspect of the economy under the control of the government, eventually ending private ownership of the means of production. From there, it would be just a few more steps to the communist utopia. This transitional system is socialism.
Socialists called themselves “social democrats,” or “democratic socialists,” advocating “social democracy.” The emphasis here is democracy. Since communism is the inevitable outcome, there is no need to short circuit the process through violent revolution. People will choose their way into communism.
During the last century, it certainly became clear that relying on markets and philanthropy alone was not an optimal strategy for a just and flourishing society. Government has assumed control of some functions to ensure the broader welfare of citizens in all of today’s capitalist societies. These functions have been “socialized.” But the broader context is still private property and market systems. “Socializing” selected functions is not a tactical progression toward communism. This is welfare capitalism. We were on our way to socialism.
However, a funny thing happened to socialism along the way through the last century. It was mugged by reality. It has become clear that socialism is fatally flawed. Market systems provide a real-time feedback loop of information, matching ever-changing demands with an ever-changing supply. Markets empower countless strangers to benefit each other through specialization and exchange. There is simply no way a centralized entity can manage the production of goods and services. Assuming those with the sufficient information could be trusted to have the wisdom and ethical courage to make optimal decisions, the endlessly churn of supply and demand makes sufficient information utterly impossible. (Other insurmountable barriers exist but that is for another day.) The “inevitable” road to communism was wrong.
Most political parties variously named “democratic socialist” or “social democrats,” have become advocates for expanding welfare capitalism. For precisely this reason, the word “socialist” has fallen out of favor in many regions. So in short, we have learned that neither pure libertarianism nor socialism is workable. We are all welfare-capitalist now: We rely primarily on private ownership and market exchange, and quibble about what societal functions might be better if socialized.
So let us look for a minute a Bernie Sanders, the “socialist” icon for hipster intellectuals. Sanders talks of making America more like Denmark – or the Nordic economic model. Are Nordic countries socialist? Finnish-American journalist, Anu Partanen, author of The Nordic Theory of Everything: In Search of a Better Life, recently noted:
The problem is the way Sanders has talked about it [Nordic economic model.] The way he’s embraced the term socialist has reinforced the American misunderstanding that universal social policies always require sacrifice for the good of others, and that such policies are anathema to the entrepreneurial, individualistic American spirit. It’s actually the other way around. For people to support a Nordic-style approach is not an act of altruism but of self-promotion. It’s also the future.
In an age when more and more people are working as entrepreneurs or on short-term projects, and when global competition is requiring all citizens to be better prepared to handle economic turbulence, every nation needs to ensure that its people have the education, health care, and other support structures they need to take risks, start businesses, and build a better future for themselves and for their country. It’s simply a matter of keeping up with the times.
In a recent address at Harvard University, Denmark’s prime minster, Lars Løkke Rasmussen, made this observation:
I know that some people in the US associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy. … The Nordic model is an expanded welfare state which provides a high level of security to its citizens, but it is also a successful market economy with much freedom to pursue your dreams and live your life as you wish.
Are you getting that? A robust welfare system is a means to a robust market economy! And that raises another issue: markets.
Paraphrasing Partanen, progressive Americans see Nordic social policies as anathema to market capitalism. They argue that allowing corporations to rig the system in the favor of a few, allegedly an inherent feature of capitalism, is social injustice. It makes no sense. If corporations are rigging the system, then it is not truly a market! The socialist answer would be for the government to assume ownership of corporations. If you just want to end inordinate privilege for big-business, then what you are advocating is – wait for it – freer markets!
In reality, there is no such thing as "free markets." Market economies are based on the premise that absent fraud, misinformation, and externalities, people will make the best and most efficient decisions about what to consume and produce for their own needs, mediated through price information generated by supply and demand. Producers who produce well will be rewarded and those that do not will eventually fold. The reality is that there is always incomplete information and there are nearly always some externalities inherent in trade. Taxes and regulation are also necessary. But generally speaking, trade unencumbered by planners or by gamers of the system leads to higher living standards.
Big-business capitalists use political power to block competition and preserve economic power. They constrain markets. Writing 240 years ago, Adam Smith wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Free markets are the answer to powerful economic players conspiring with government to choke off competition and preserve their privileged status through subsidies, tariffs, and onerous legislation.
Socializing some aspects of society is not antithetical to market economics. We cannot deliver some social goods through markets, or at least not deliver them well. But we must have a robust market economy to generate the tax revenue to make socialized services sustainable. Denmark is the top rated country in the world on business and trade. The other Nordic countries are right behind them. This is not the Sanders model.
Sanders wants to institute protectionist policies, raise taxes on corporations (USA is already on the high side), set a minimum wage 50% higher than other developed countries, and do a host of other trade unfriendly measures. Meanwhile, taxes for all but the wealthiest will stay low (taxes in Nordic countries are high for everyone.) He wants to expand the safety net golden egg while strangling off the goose that lays it. He thrives on populist anti-market and anti-business sentiment. Curiously, Clinton is probably closer to the Nordic model, embracing an expanded and smarter welfare model, while championing (at least in the past) trade and business. Yet she dismisses Denmark as contrary to this vision. Partanen speculates Clinton knows her plans are more genuinely like Denmark than are Sanders’ but she avoids association with the Nordic model because of public misconceptions. I think that is true.
So why are so many supposedly well-educated people now calling themselves socialists? One big reason is surely economic illiteracy. Going back to at least the 1930s, conservatives warned of “socialism” with the advent of Social Security. Same with Great Society programs in the 1960s - now also with ACA and talk of single-payer healthcare. To some degree, left-leaners just decided to own the moniker. Simultaneously, enough libertarian-leaning folks falsely used free markets to rationalize away ANY government involvement in anything; so many lefties just owned this misconception of “free market.” What they want is a more robust version of welfare capitalism and less big-business domination. Economic illiteracy is my generous reading of why people call themselves socialist. But I have a less generous reading as well.
Americans are not wrong to abhor the specters of socialism and big government. In fact, as a proud Finn, I often like to remind my American friends that my countrymen in Finland fought two brutal wars against the Soviet Union to preserve Finland’s freedom and independence against socialism. No one wants to live in a society that doesn’t support individual liberty, entrepreneurship, and open markets. But the truth is that free-market capitalism and universal social policies go well together—this isn’t about big government, it’s about smart government. …
Like the Finns, countless Americans fought to keep America free from the totalitarian ideologies that emerged in the last century. They largely won. They considered it a legacy to pass to future generations of America and to the world. Rightfully so. So why would people seeking a more robust welfare state and less big-business domination call themselves socialists?
Inigo Montoya is wrong with regard to many of the new “socialists.” They know exactly what the word means! They know the emotion it stirs. The misuse is intentional. Calling yourself “socialist” is the left’s version of Trumpist politics: Stir up tribal rivalry with incendiary language. Raise a verbal middle finger to your opponents. When they call you on it, roll your eyes with incredulity that people would accuse you of advocating totalitarianism. “After all, we just want to improve the safety net end reign in corporate greed like any good social democrat.” So to my “socialist” friends who cannot fathom the origins of anger in Trump voters, part of the answer is staring at you in the mirror. Sow the wind and reap the whirlwind.
If your sole concern is fomenting tribal political battles, then the above is mostly irrelevant to you. Calling yourself a socialist is effective for your purposes. If you care about clarifying the truth in pursuit of a greater good for humanity, then you will use language that is faithful to what is being described. Whether through illiteracy or insolence, “socialism” fails that standard. You really need to stop using that word.
Are you smarter than a chimp? When it comes to knowledge about global socioeconomic trends, there is a good chance you are not. For years, Swedish global health expert, Hans Rosling, has been giving Ted talks and making presentations about global trends. One his favorite teaching tools is to ask people a question like this:
Globally, over the past 20 years, the rate extreme poverty has:
Now chimps will select at random, giving a 33% chance of each answer. Yet when Rosling asks audiences, at least half will say A, a sizable percentage will say B, while a few will say C. Yet C is the correct answer! This is the case on one variable after another. Audiences routinely score worse than chimps, choosing the most negative option.
As an old adage has it, "It isn't what we don't know that gets us in trouble. It's what we know that ain't so." That we routinely pick the wrong answer more often than chimps shows that we clearly we have bias.
In the Ted talk, How not to be ignorant about the world, Hans' son Rosling notes that part of the problem is our education system. Teachers go to college at a particular point in time and learn the state of the world at that time. But they tend not to learn about ongoing developments. The data has often been hard to come by and hard to interpret. So teachers are biased by what they learned years ago. (Reporter have the same problem.) But there are other factors.
During our evolutionary history, our brains became wired to notice threats. Hunters walking through the brush who were attentive to the possibility of tigers lying in wait, likely survived those who went about carelessly enjoying a beautiful day. So when we reflect on broad human trends, we are disposed to fixate on perceived threats. What was useful for us in the wild, is counter-productive for us as we try to interpret socioeconomic trends. If you want to outscore a chimp on an exam about global well-being, Ola Rosling suggests that you must drop your predispositions and adopt these four rules of thumb:
1. Assume most things are improving.
2. Assume most people are in the middle of a distribution, not a binary of rich and poor.
3. Assume social development precedes becoming wealthy. (Don’t assume that a population must be rich before meeting basic social needs.)
4. Assume you are exaggerating the threat if the topic is something about which you personally have great fear.
Additionally, Hans, Ola, and others have been working to build the Gapminder website to provide you with data that can be presented in meaningful ways. But one of the most important contributions the Roslings have made is their collection of entertaining and informative videos. In this post I am including every video I can find with a brief annotation. (I'll add more as I find any.) Many of the videos overlap or cover similar data but they are all well worth viewing. So here is your resource for becoming smarter than a chimp. Don't say I never gave you anything.
(This link also has links to most of these videos including some shorts not listed here: Gapminder Video)
Hans Rosling's 200 Countries, 200 Years, 4 Minutes (2010)
If you are just getting acquainted with Rosling, I'd begin here. This 4 minute presentation gives you a quick sense of what he is talking about.
Hans and Ola Rosling: How not to be ignorant about the world. TED June 2014
This is the second video to watch. The front half is Hans making his case that the world is improving and the back half is Ola explaining, as I recounted above, why are so disinclined to see positive change.
Hans Rosling: The magic washing machine. TED December 2010
This is the third one to watch. This one of my favorites. While fully embracing the concern about environmental impacts of economic growth, Rosling shows the importance of economic growth through the story of the washing machine.
THE REST ARE IN CHRONOLOGICAL ORDER
Hans Rosling: The best stats you've ever seen. TED February 2006
The TED presentation that kicked it all off. He focuses on the positive changes underway in world and points to his efforts to liberate, integrate, and animate data, and to find ways to present data the public finds understandable.
Hans Rosling: New Insights on Poverty. TED March 2007
Rosling shows that social development tends to precede economic development. He addresses the issue that unfortunately to date, economic development has always been based on fossil fuels. Higher yields, technology, and markets are key to ending poverty but there are more dimensions that need our attention like human rights, environment, governance, economic growth, education, health, and culture. The ending has a great surprise!
Human Rights and Democracy Statistics- Gapminder c. 2008
Rosling describes why human rights are so hard describe and evaluate.
Yes they can! - Gapminder c. 2008
Rosling explains that poor nations will one day become prosperous and we should welcome that.
Poor Beats Rich in MDG Race - Gapminder c. 2008
Rosling shows that countries that have developed from poverty to well-being have done so at far faster rates that Western nations did. Poor countries today can make the transition much quicker because of what previous countries have learned.
What stops population growth? - Gapminder c. 2008
The key to ending population is small families, and the key to small families is childhood survival.
Hans Rosling: Insights on HIV, in stunning data visuals. TED February 2009
Uses Gapminder data to show nuances in how AIDS has spread and what it takes to defeat it.
Hans Rosling: Let my dataset change your mindset. TED June 2009
This is the third video should watch. Rosling deconstructs the dichotomy of wealthy and developing nations, and challenges the idea of thinking in sweeping terms like "Africa."
The Joy of Stats with Professor Hans Rosling - Gapminder c. 2010
Rosling shows how making data available and animating is empowering people to make better decisions, sometimes without really realizing they are using statistics.
Hans Rosling: Asia's rise -- how and when. TED Nov 2009
Rosling forecasts when China and India catches up with the USA and UK.
Hans Rosling: Global population growth, box by box. TED June 2010
Rosling says that child survival is the new green. This video explains why.
Hans Rosling: The good news of the decade? We're winning the war against child mortality. TED September 2010
Rosling breaks down the remarkable trends in child mortality. Education of women accounts for at least 50% of the drop.
Hans Rosling: Religions and babies. TED April 2012
Religion is not a factor in family size. No significant difference between Islamic and Christian countries when it comes to births per woman. The defining difference is economic well-being.
DON'T PANIC — Hans Rosling showing the facts about population. BBC November 2013
A one hour investigation into the dynamics of population growth using stories about real live families interspersed with Rosling's entertaining presentation of data.
Don't Panic - How to End Poverty in 15 Years. BBC September 2015
No embed is available.
Here is a link to a series of short videos on how to use development data visually.
Virginia Postrel has an interesting article at Bloomberg "Progressive and Racist. Woodrow Wilson Wasn't Alone," a book review Thomas Lenoard's Illiberal Reformers: Race, Eugenics and American Economics in the Progressive Era. Here are a few key quotes:
The progressives believed, first and foremost, in the importance of science and scientific experts in guiding the economy, government, and society. Against the selfishness, disorder, corruption, ignorance, conflict and wastefulness of free markets or mass democracy, they advanced the ideal of disinterested, public-spirited social control by well-educated elites. The progressives were technocrats who, Leonard observes, “agreed that expert public administrators do not merely serve the common good, they also identify the common good.” Schools of public administration, including the one that since 1948 has borne Woodrow Wilson’s name, still enshrine that conviction.
Later, she writes:
Advocates similarly didn’t deny that imposing a minimum wage might throw some people out of work. That wasn’t a bug; it was a feature -- a way to deter undesirable workers and keep them out of the marketplace and ideally out of the country. Progressives feared that, faced with competition from blacks, Jews, Chinese, or other immigrants, native-stock workingmen would try to keep up living standards by having fewer kids and sending their wives to work. Voilà: “race suicide.” Better to let a minimum wage identify inferior workers, who might be shunted into institutions and sterilized, thereby improving the breed in future generations. ...
... Clark’s theory is now a foundation of mainstream labor economics. In his day, however, it was highly unpopular. “A key element of resistance,” writes Leonard, “was that many progressives were reluctant to treat wages as a price,” rather than a right of citizenship and social standing. Informed by their beliefs in scientific racism, most progressives preferred wages to favor some groups over others: men over women, whites over blacks, and most prominently, native stock over immigrants.
Although they generally assumed black inferiority, progressives outside the South didn’t worry much about the “Negro question.” They were instead obsessed with the racial, economic, and social threats posed by immigrants. MIT president Francis Amasa Walker called for “protecting the American rate of wages, the American standard of living, and the quality of American citizenship from degradation through the tumultuous access of vast throngs of ignorant and brutalized peasantry from the countries of eastern and southern Europe," whom he described in Darwinian language as “representing the worst failures in the struggle for existence.”
So restricting immigration was as central to the progressive agenda as regulating railroads. Indeed, in his five-volume History of the American People, Wilson lumped together in one long paragraph the 1882 Chinese Exclusion Act and the 1887 Interstate Commerce Act as “the first fruits of radical economic changes and the rapid developments of trade, industry, and transportation” -- equal harbingers of the modern administrative state. With a literacy test and ban on most other Asian immigrants enacted in 1917 and national quotas established in 1924, the progressives bequeathed to America the concept of illegal immigration.
The first paragraph is preface for what follows. It relates why I eschew the label "progressive" despite having some sympathies for some aspects of what today's progressives espouse. In my estimation, "progressivism," then and now, contains substantial hubris - believing that through dispassionate logic, science, and a superior moral locus, we are justified in moving heaven and earth to bring about a brave new world. Institutions and practices that have emerged through time as practical ways of making the world work be damned! I believe most change should be modest reform, not revolution. It is in this sense that I would claim the term conservative. We want to conserve the good as we seek improvement. We aren't that smart and we aren't that noble, when it comes to redesigning the world.
The minimum wage piece is particularly interesting. While impacts of minimum wage increases art notoriously complex and difficult to summarize with precision, most economists agree that substantial increases in the minimum wage dampen job growth overtime. There are studies that show, just as the early progressives logically surmised, that increased minimum wages have a negative impact on the employment of minorities, particularly young black men.
I am definitely going to read this book!
Denmark became a central topic during the Democrats' debate last week. Bernie Sanders calls himself a democratic socialist. Hillary Clinton loves Denmark but is dismissive of the idea that America can be Denmark. This inspired a number of articles by various commentators about the truth behind Denmark economic model (or the Nordic model more generally.) Progressives like the high taxes, low inequality, and high government spending. Conservatives counter by noting that the Nordic countries rank among the countries highest in free trade and low corporate taxes. I've been linking articles on Facebook but I thought this piece in Niskanen was the best. Double-Edged Denmark
Right-leaning arguments about the free-market marvel that is Denmark cut both ways. Denmark shows us that a much larger public sector and a much more robust social-insurance system need not come at the expense of a dynamic market economy. In other words, Denmark shows us that capitalism and a large welfare state are perfectly compatible and possibly complementary.
The lesson Bernie Sanders needs to learn is that you cannot finance a Danish-style welfare state without free markets and large tax increases on the middle class. If you want Danish levels of social spending, you need Danish middle-class tax rates and a relatively unfettered capitalist economy. The fact that he’s unwilling to come out in favor of either half of the Danish formula for a viable social-democratic welfare state is the best evidence that Bernie Sanders is not actually very interested in what it takes to make social democracy work. The great irony of post-1989 political economy is that capitalism has proven itself the most reliable means to socialist ends. Bernie seems not to have gotten the memo. But Bernie Sanders isn’t the only one failing to come to terms with the implications of Danish social-democratic capitalism.
The lesson free-marketeers need to learn is that Denmark may be beating the U.S. in terms of economic freedom because it’s easier to get people to buy in to capitalism when they’re well-insured against its downside risks. That’s the flipside irony of free-market “socialism. ...
... the reason the U.S. is lagging so far behind big-government Denmark on free trade, corporate taxation, ease of doing business, and more may very well be that the American safety net isn’t good enough, and economic insecurity at the bottom and middle makes free-market policies a tough sell to anxious American voters.
I don’t know that this is true. But, then again, libertarians and free-market conservatives don’t know that it’s not. Mostly, ideological American capitalists really badly want to believe it’s not true that we’re falling behind Denmark as capitalists because we’re not redistributive enough. (I mean, the previous paragraph made me feel like I was channeling E.J. Dionne, which was … unsettling. But let us put away childish things.) Because if it is true, and social insurance and capitalism are complementary in this way, then champions of economic liberty will be forced to face up to the possibility that attacking the welfare state undermines support for laissez faire economic policy. Some of us might even be forced to choose between our love of capitalism and dislike of the welfare state. Awkward. ..."
Economic development always includes, in some broad sense, an embrace of trade and freedom from arbitrary interference in market activity. Yet when you look at the various nations that rose to affluence in the last century, diverse paths were taken to get there. The particular path toward trade and freedom seems not to be as important as is the issue of stability. When the various players in the economy and society behave in predictable patterns, they are better able to predict and coordinate their behavior, even if the patterns are not optimal in terms of trade and freedom. Imposition of trade and freedom that generates too much instability may be worse than simply staying with less effective economic models in the short-run and letting things evolve.
This need for security and stability is a piece that is frequently undervalued by most libertarians at both the macro and micro levels. Economic historians will tell you that one of the pivotal developments in history (among several) was the emergence of limited liability. People could pool their resources and form joint ventures without putting their entire assets at risk. Bad choices or unforeseen developments would not leave you destitute.
If the aim is a dynamic risk-taking economy leading to high productivity and economic growth, then we need security and stability for citizens. With a basic safety net in place (here I’m thinking mostly of a guaranteed minimum income as opposed to our wasteful welfare industry), people would become less risk-averse, knowing that trying new stuff doesn’t lead to destitution if you fail.
But if libertarian conservatives are blind to issues of security, then progressives are blind to productivity and economic growth. Take the living wage debate. It is said that Walmart’s low wages are possible because we taxpayers subsidize the workers through the welfare system. Nonsense. Welfare support drives up wages. If the wages aren’t at least comparable to welfare options, then why work?
Furthermore, while each business should have the aim of helping their employees flourish (improving their skills and providing opportunity to gain more responsibility in a safe environment), businesses are neither benefactors nor aid agencies. They are the institutions responsible for transforming matter, energy, and data from less useful forms to more useful forms on a sustainable basis. Sustainability means creating more value than the value of resources being used. Wages artificially set above the economic value contributed by labor are unfavorable to productivity and sustainability.
I know of no country, including the Nordic countries, who presume that every job in every circumstance should provide a “livable” income “unsubsidized” by government. Minimum wage is a temporary introductory wage people earn as they develop skills and experience. Few earn it for more than a period of few months. Excessively high introductory wages compels businesses to adapt in ways that reduce the amount of this labor they use, and decrease the opportunities for the least-skilled to find an on-ramp into the economy.
So while precisely replicating the Danish or Nordic model in a large diverse nation like the United States may not be feasible, there are lessons here. To the degree the Nordic models have worked, they have done so because they have successfully married security and growth. This is a managed polarity for them, much like breathing embraces both inhaling and exhaling. In America, our partisan factions each grasp one pole of the polarity and demonize the other. To the degree either succeeds, we are in deep trouble. That is the lesson I learn from double-edged Denmark.
Angus Deaton has dug into obscure data to explore a range of problems: The scope of poverty in India. How poor countries treat young girls. The link between income inequality and economic growth.
The Princeton University economist's research has raised doubts about sweeping solutions to poverty and about the effectiveness of aid programs. And on Monday, it earned him the Nobel prize in economics. ...
... He also hit upon what the Nobel committee called an ingenious way to discover whether families in poor countries spent less to care for daughters than for sons. Among other things, he studied how much households spent on "adult" items, such as beer and cigarettes, to see whether families consumed things differently depending on the sex of newborn children.
His surprising conclusion: They didn't.
Another Deaton study challenged the once-popular notion that malnutrition caused poverty by making people too weak to find work. He found the relationship worked the other way: Being poor caused people to be malnourished. ...
I'll need to read more.
Ethics and Economic Education of New England: Buying local and blocking out the sun
Incorporating the lens of opportunity cost into to decision-making is probably one of contributions of economic thinking. Failure to incorporate it is what often leads well intentioned movements into destructive outcomes. Jason Sorens does a good job illustrating this with the "Buy-Local" movement.
So return to the example of the plastic bins [Buying bins for $1 at Wal-Mart vs. local for $2]. If I buy them from Wal-Mart, I save $1. I can use that dollar to buy other things or to invest in producing things (by saving). I am better off than if I buy the bins at $2 each from the local retailer, Wal-Mart is better off, and whoever would benefit from my spending or saving that extra dollar is also better off. Only the local retailer is worse off.
Do the gains from buying from Wal-Mart rather than the local retailer in this example outweigh the losses? Yes. To see this, imagine that everyone bought local, all the time. Cars, airplanes, software, clothing, food… everything would have to be made and exchanged in the town where you live. What would happen to everyone’s standard of living? It would fall dramatically. (How many skilled airplane manufacturers does your town have?) The same principle applies at the national level, or any other geographic level you choose. If you buy everything within that circumscribed area and exclude everything outside it, your community will be worse off than it would be if it bought from any willing seller.
Now, that’s an extreme example, but it illustrates the principle. Some things are impossible to make locally (airplanes). Other things are difficult and costly to make locally (shipping and retailing of plastic bins). A few things will be most efficiently and affordably made locally, and you will want to buy them locally without having to be goaded into doing so – they’ll simply be the best products for the price. Goading your community into buying shoddier or more costly products just because they’re local or American or whatever just makes your community poorer.
Read the whole thing.
The Atlantic: The Danish Don't Have the Secret to Happiness
A common meme in economic discussions is that we need to make America more like Scandinavian countries where things are more equal and people are happier. Denmark, land of my ancestors, is often the poster child.
There is much to debate about economic policy but few seem to question what is meant by "happy." "Happy" is one of those words of which everyone knows the meaning until you try to define it. Happiness is shaded different ways in different cultures.
Michael Booth writes:
These rules set out the Law of Jante, a kind of Danish Ten Commandments, the social norms one should be aware of if one is planning a move to the north:
- You shall not believe that you are someone.
- You shall not believe that you are as good as we are.
- You shall not believe that you are any wiser than we are.
- You shall never indulge in the conceit of imagining that you are better than we are.
- You shall not believe that you know more than we do.
- You shall not believe that you are more important than we are.
- You shall not believe that you are going to amount to anything.
- You shall not laugh at us.
- You shall not believe that anyone cares about you.
- You shall not believe that you can teach us anything.
The truth is, Sandemose really nailed the Danes. My experience has been that Jante Law, which has become a national social manifesto of sorts, operates everywhere in Denmark on some level or another.
On the face of it, the Danes have considerably less to be happy about than most of us. Yet, when asked, they still insist that they are the happiest of us all.
What is one to make of this?
The obvious response is, “Define happiness.” If we are talking heel-kicking, cocktail-umbrella joie de vivre, then the Danes do not score highly, and I suspect not even they would take their claims that far. But if we are talking about being contented with one’s lot, then the Danes do have a more convincing case to present.
Over the years I have asked many Danes about these happiness surveys—whether they really believe that they are the global happiness champions—and I have yet to meet a single one of them who seriously believes it’s true. They appreciate the safety net of their welfare state, the way most things function well in their country, and all the free time they have, but they tend to approach the subject of their much-vaunted happiness like the victims of a practical joke waiting to discover who the perpetrator is.
On the other hand, these same Danes are often just as quick to counter any criticism of their country—of their schools, hospitals, transport, weather, taxes, politicians, uneventful landscape, and so on—with the simple and, in a sense-argument-proof riposte: “Well, if that’s true, how come we are the happiest people in the world?” (This usually accompanied by upturned palms and a tight, smug smile.) The happiness argument does come in handy sometimes, I guess.
Newspaper editor Anne Knudsen had an interesting theory relating to why the Danes continue to respond positively to happiness surveys: “In Denmark it is shameful to be unhappy,” she told me. “If you ask me how I am and I start telling you how bad I feel, then it might force you to do something about it. It might put a burden on you to help me. So, that’s one of the main reasons people say things are all right, or even ‘super.’”
Here’s another convincing theory, posited by a Danish friend of mine: “We always come top of those surveys because they ask us at the beginning of the year what our expectations are,” he said. “Then they ask us at the end of the year whether those expectations were met. And because our expectations are so extremely low at the beginning of the year, they tend to get met more easily.”
Later he writes:
With that in mind, I had a standard question that I asked most of my interviewees: “What are your fears for the future of Denmark?” One word cropped up more than any other in their responses: complacency. Many of my interviewees were worried that the Danes had it too good for too long, that they were now content to sit back in their Arne Jacobsen San armchairs and watch the plates wobble and fall. Worryingly for the Danes, the latest OECD Better Life Index of life satisfaction saw them plummet to seventh place, behind Norway and Sweden, among others. ...
... Danish society appears to have reached maturity, some would argue to a state of perfection, others to a perilous halt. The fear is that the next stage will be stagnation and decline. What happens when you develop a genuinely almost nearly perfect society in which there is nothing left to achieve, nothing to kick against, or work for?
But I had one other question I always asked, which, in its way, was even more revealing. Whenever I asked my Danish interviewees whether they could think of a better country to live in, the answer was invariably a thoughtful silence.
My point is not so much about which society is better, America or Denmark. The point is that I think "happiness," and how we report it, is different. It strikes me that Denmark is more about keeping expectations low and being content with things staying mostly as they are. That is what will make you happy. While in America, I am not "happy" with my life as it is but I am "happy" that I have an unalienable right to "life, liberty, and the pursuit of happiness," and that I will one day have a "happier" life. Happiness is found in the striving and achievement. I'm painting with broad brushes but hopefully you see my point. Consequently, comparing survey's about how "happy" people say they are is not as clarifying as advocates of the Scandinavian economics would make it seem.
We are getting richer. Not every human being on the planet and not every country. But the average person has an economic standard of living that's far better than it used to be.
One way of measuring it is to look at the amount of goods and services produced per person - gross domestic product or GDP per capita.
For the global population that rose almost fourfold in the 60 years up to 2010.
There were some marked divergences between countries. In China the increase was a stunning eighteen-fold. South Korea and Taiwan managed even more. On average, they are 25 times richer than in 1950.
A few countries, mainly in Africa, lost ground. In the Democratic Republic of Congo average living standards fell by more than half in the same period. ...
... One benefit from that is that we are living longer. In the middle of the last century a new-born baby could expect to live 50 years. Now the figure is 70. Once again there are large variations between countries but the favourable trend in that period is present in almost every nation - Botswana is the only one where life expectancy declined (by a few months). ...
... There is of course a debate, a rather vigorous one, to be had about just how bad a thing rising inequality really is. That is even more true of the question of what, if any, government policies should be employed to tackle it.
Rising inequality is a reminder that, richer though the world is, some people don't feel it.
This article does a good job at highlighting postive trends while also recognizing that improvements are uneven. The article touches on concerns about inequality but there are also environmental impact and resource depletion issues to be raised. The key to wisdom is understanding that these trends - the positive and the negative - are all interconnected.
Is the greater concentration of wealth at the top (to the degree it is really happening) a by-product of the same forces that are lifting hundreds of millions of people out of poverty? If so, blindly attacking wealth inequality and may thwart the progress of millions climbing out of poverty.
Is the global economic growth that is improving the living standards of so many people also causing damage to the climate and environment to the point that one day soon we all will see our living standards diminish? If so, blindly pursing economic growth may actually end up diminishing our quality of life.
The key is to think holistically. Populist movments usually take us in the opposite direction.
Project Syndicate: What Good Are Economists?
"... One reason may be the perception that many economists were smugly promoting the “efficient markets hypothesis” – a view that seemed to rule out a collapse in asset prices. Believing that markets always know best, they dismissed warnings by a few mere mortals (including me) about overpricing of equities and housing. After both markets crashed spectacularly, the profession’s credibility took a direct hit.
But this criticism is unfair. We do not blame physicians for failing to predict all of our illnesses. Our maladies are largely random, and even if our doctors cannot tell us which ones we will have in the next year, or eliminate all of our suffering when we have them, we are happy for the help that they can provide. Likewise, most economists devote their efforts to issues far removed from establishing a consensus outlook for the stock market or the unemployment rate. And we should be grateful that they do.
In his new book Trillion Dollar Economists, Robert Litan of the Brookings Institution argues that the economics profession has “created trillions of dollars of income and wealth for the United States and the rest of the world.” That sounds like a nice contribution for a relatively small profession, especially if we do some simple arithmetic. There are, for example, only 20,000 members of the American Economic Association (of which I am President-Elect); if they have created, say, $2 trillion of income and wealth, that is about $100 million per economist.
A cynic might ask, “If economists are so smart, why aren’t they the richest people around?” The answer is simple: Most economic ideas are public goods that cannot be patented or otherwise owned by their inventors. Just because most economists are not rich does not mean that they have not made many people richer. ..."
Social Science Research Network: The (True) Legacy of Two Really Existing Economic Systems
By running an experiment among Germans collecting their passports or ID cards in the citizen centers of Berlin, we find that individuals with an East German family background cheat significantly more on an abstract task than those with a West German family background. The longer individuals were exposed to socialism, the more likely they were to cheat on our task. While it was recently argued that markets decay morals (Falk and Szech, 2013), we provide evidence that other political and economic regimes such as socialism might have an even more detrimental effect on individuals’ behavior.
... If socialism indeed promotes individual dishonesty, the specific features of this socio-political system that lead to this outcome remain to be determined. The East German socialist regime differed from the West German capitalist regime in several important ways. First, the system did not reward work based to merit, and made it difficult to accumulate wealth or pass anything on to one’s family. This may have resulted in a lack of meaning leading to demoralization (Ariely et al., 2008), and perhaps less concern for upholding standards of honesty. Furthermore, while the government claimed to exist in service of the people, it failed to provide functional public systems or economic security. Observing this moral hypocrisy in government may have eroded the value citizens placed on honesty. Finally, and perhaps most straightforwardly, the political and economic system pressured people to work around official laws and cheat to game the system. Over time, individuals may come to normalize these types of behaviors. Given these distinct possible influences, further research will be needed to understand which aspects of socialism have the strongest or most lasting impacts on morality.
On a related note, I would add that there is a correlation between trust of (and care for) strangers and the degree to which a country is market oriented. It isn't clear whether trusting people are more inclined to engage in market exchange or market exchange makes people more trusting. One thought is that market exchange makes people interdependent and more attuned to the plight of others than does a centralized economy or a highly distributed economy where people are constrained to cooperating within face-to-face community.
From MRUniversity, Everday Economics:
"We are pleased to announce a brand new course at MRUniversity, Everyday Economics. The new course will cover some of the big ideas in economics but applied to everyday questions. The first section, premiering now and rolling out over the next several weeks, features Don Boudreaux on trade. Tyler will appear in a future section on food. You can expect more from me as well. Indeed, you may spot both Tyler and I in some cameos (ala Stan Lee) in some of Don’s videos!
Here’s the first video on trade and the hockey stick of human prosperity."
I concluded my last post with this summarization:
So summarizing to this point, human beings are made in the image of God. As such, we have intrinsic value apart from any economic consideration. Our labor and the goods we produce have instrumental value and that relative value is set by the community through exchange in the market place, incorporating subjective and objective information into a real-time feedback loop. The market is far superior to the alternatives in setting value but it is far from perfect. That means there is “noise” in the feedback loop. But from the standpoint of Christian ethics, market imperfection isn’t the only source of noise in the market.
So what is the additional “noise” to which I am referring? Sin. I began this series noting that according to the biblical narrative, we were created for service as priests in God’s holy temple (creation) and appointed vice-regents over creation, bringing the world to full flourishing. The vision is of a world where we are in communion with God and the whole community flourishes.
I have argued that the development of market exchange in creating a real-time feedback loop to coordinate human action beyond face-to-face communities is truly a remarkable achievement. What needs to be made explicit here is that the market greatly facilitates all varieties of human action … from the noble to the vile. The market system that efficiently eliminates famine through the efficient distribution of food is the same market system that makes pornography abundant and inexpensive. If the aim is a shalom-filled world, then clearly this amplification of sin is “noise” in the system.
Sin manifests itself in other ways. Some people will game the system for themselves against others through deceit, theft, discrimination, and any number of nefarious tactics. Strong legal systems are needed to protect against this behavior. Yet those same legal systems are frequently used by those with power to protect their interests from competitors and from market forces. These also feed “noise” into the market feedback loop.
So we are left with a market system that, while a substantial improvement over any alternative we know to date, is imprecise. And as Harvard economist Greg Mankiw recently noted, the field of economics is where medicine was two hundred years ago. Economics gives us considerable insight, much more than we would have without it, but our understanding is so imprecise that it is not always possible to predict consequences with high levels of certainty. So there is an epistemological challenge.
We are also left with a market system that amplifies detrimental desires every bit as well as virtuous desires. This means injustice will be present. The impulse is to block undesirable behavior. But who ultimately decides which things are not acceptable? One person may support legal marijuana while wanting to ban genetically modified organisms. Others may support genetically modified organisms but think prostitution should be illegal. Yet others may think prostitution should be legal but nuclear power should be illegal. And on it goes. And even when a majority agrees about the undesirability of a particular practice, does banning it actually improve matters? Think prohibition of alcohol during the 1920s.
Jesus tells a parable about a farmer who sows wheat but his enemy later sows tares in the same field. Wheat and tares are indistinguishable until they approach maturity, making it impossible to sort them out until the harvest approaches. Attempt to rip out the tares and you will likely destroy much wheat. Similarly, aggressive attempts to control behavior to make the market produce only “good things” by weeding out the bad stuff can often have destructive consequences.
This presents us with challenging moral issues. As G. K. Chesterton once wrote, we want to “… give room for good things to run wild.” Freedom and innovation are critical to achieving greater shalom. Furthermore, virtue that is chosen and acted on freely is far more vibrant than virtue that is imposed. But freedom means the freedom to choose sin and oppression. It means the emergence of injustices, whether intentional or not. Do we just turn a blind eye?
Adding to this moral challenge is the fact the Bible is from the time and culture of the advanced agrarian societies of the ancient Near East. Making direct application from biblical circumstances is problematic. Land and labor were the primary means of production. Productivity was virtually fixed, which meant the economy was very much a zero-sum game; someone’s win was someone else’s loss. Consequently, economic moral reflection was concentrated on consumption and generosity. The role of radically altering productivity, as occurred in the modern era, is not even in view. There was no “economics” in any modern sense of that word with data analysis and theory being empirically tested. Their understanding was philosophical and pedestrian at best. How do we apply Scripture to modern economic concerns?
Then there are the technical issues. We know markets are a remarkable advance but they are imperfect. The primary debate in economics is not over whether markets are seen as good. They almost universally are seen as such among economists. The question is over how well they work. Those with more conservative leanings tend to think that markets are very effective and will somewhat spontaneously resolve economic difficulties with minimal interference. Liberal economists are more inclined to see more substantial flaws in the market, needing more intervention from informed experts who can mitigate some of the more serious problems. (Personally, I think conservatives oversell the “invisible hand” notion of the market but liberals greatly overestimate the ability of experts to intervene in just and effective ways. That leaves me open to experimenting with options to improve market outcomes but deeply skeptical of grand schemes promoted by some liberals to restructure and manage the markets. Epistemological humility is the key. But I digress.)
So I return to opening paragraph that began this four part series:
On what basis should people be compensated for their work? Economists say the value of labor is a function of supply and demand. Wages should correspond to the economic value of work. Theologians often object. (Note: We are all theologians but here I’m referring to those formally educated in theology.) They say it dehumanizes people. People are not faceless cogs in a machine to be differentially valued based on their economic contribution. Everyone is equal in God’s eyes. Income and wealth should be shared equitably.
What are we to say?
I think what we must not do is resort to economism, or trusting in quasi-deities like an “invisible hand” to spontaneously resolve all economic issues. We must also refrain from theologism, and quoting Bible passages rooted in the advanced agrarian societal context of the biblical era as prescriptions for economic policy today. The Parable of the Talents is not an endorsement of capitalism any more than sharing things in Acts 2 is an endorsement of communism. Both are anachronistic readings.
I think we have to take seriously the objective reality of how prices and value are set. Having prices accurately reflect supply and demand, leading to an efficient allocation of productive resources, is more than an esoteric concern of economists. An accurate economic feedback loop is important to human flourishing. If we value justice and flourishing, then we are not free to forcibly adjust prices to something we arbitrarily deem as “fair.”
I think we need to be ever cognizant that markets don’t always work perfectly and sometimes there are imbalances in power that may require intervention. Just because the market sets a price for a particular type of labor, doesn’t necessarily mean that price was justly achieved. We need to root out injustices and compensate when great imbalances emerge.
I think that seeking the common good means finding ways to empower those who cannot earn a living wage to do so or possibly to alter our business models so they create jobs that incorporate capacities that can command a livable income, or at least open a path to a livable wage. And certainly we must make provision in society for those who are without the mental or physical capacity to support themselves.
So in concluding this series of four posts, my aim has been to advocate for a strong embrace of both economic understanding and theological reflection. Theologians bemoan theological illiteracy among economists. It is not without merit. They accuse economists of smuggling in values and representing them as science. That happens too. But economic illiteracy among theologians is at least as equally profound. Until the two camps are ready to stop tossing grenades across an intellectual wall at each other and begin the work of really engaging with each other to understand what is truly being said from both disciplines, the church has no hope of influencing the economy and culture.
Alex Tabarrok wirtes today, The Moral Inversion of Economic Thinking:
In a delightful, short article on Economics and Morality, Timothy Taylor asks why economics has a reputation for leading to corruption:
Political science, history, psychology, sociology, and literature are often concerned with aggression, obsessiveness, selfishness, and cruelty, not to mention lust, sloth, greed, envy, pride, wrath, and gluttony. But no one seems to fear that students in these other disciplines are on the fast track to becoming sociopaths. Why is economics supposed to be so uniquely corrupting? ...
Arnold Kling gives one answer:
I think that economics is singled out for opprobrium because of the way that it challenges the intention heuristic. The intention heuristic says that if the intentions of an act are selfless and well-meaning, then the act is good. If the intentions are self-interested, then it is not good. ...
Both articles offer some important insights but I think Tabarrok sums it up well:
... Standard morality, as Kling argues, often stops at intentions while economists are interested in consequences. Consequentialist philosophers also look at consequences but economists have the tools to trace interactions as they sort themselves into an equilibrium. Equilibrium outcomes may be very far from intentions. As a result, we find that economists often places themselves and their discipline in opposition to standard morality.
Two thoughts. First, many economists routinely make the assumption that growth and efficiency take priority in almost all circumstances. So it isn't always true that everything comes down to economists offering value-free analysis of any given topic.
Second, with the above caveat, this inattention to consequences is what is maddening with so many moralists. When an economist demonstrates that a good intention doesn't have the desired outcome, the economist is branded as immorral, or at least being guilty of economism. Theologians are fond of noting that the Bible says more about economic issues than any other topic, yet very few have ever studied any economics. Theologism is pervasive and for that reason the church finds itself ineffectual in shaping the culture.
This is a an excellent series of animated videos about some basic economic principles done by Bryan Caplan. (I particularly like the ones on foreign trade and on the pessimistic bias.) The first video is an introduction. Each of the next four deal with a particular type of widespread bias. I'm not saying I give unqualified support to each idea presented here but these are great conversation starters. Enjoy!
Human beings were made in the image of God. Each person has intrinsic value. Our value is unrelated to the economy. But goods, resources transformed from their natural state, to a more useful state have instrumental value. The same is true for the labor used to make them. That was the subject of the first post.
In my second post, I said two factors influence the value of a good:
The community places a value on a good through market exchange. The value fluctuates as collective priorities shift. The price mechanism creates a real-time feedback loop about community priorities.
Today, we need to look at the objective aspect of value. The availability of a good, or of specialized labor to accomplish some task, has an impact on its value. Compare a bottle of water and a diamond. Water is far more important than diamonds. You cannot go more than a few hours without water but you can live a long life without ever seeing a diamond. Yet diamonds are more far more expensive. Why? Diamonds are far less plentiful and more difficult to procure than a few ounces of water. The limited demand for highly inaccessible diamonds makes the next diamond consumed expensive while the universal demand for the next 24 ounces of abundant water does not.
I frequently hear conversations lamenting that teachers are paid so little while professional basketball players (or CEOs, or entertainers, or whoever you might want to insert) earn millions. Note that the underlying presumption is that salary should be correlated with the importance of work. What about the supply of workers who can do the work? Let us do a comparison.
The average annual salary for a school teacher is $56,000. Kobe Bryant, the highest paid player in the National Basketball Association, has an annual salary of $30,000,000. Which of these two professions is more important to the life of our community? Most people say it is a school teacher. So if value of the labor comes from the subjective value of the community, isn’t this compensation horribly out of line with what we say we value? Not necessarily. This similar to saying 20 ounces of water should cost much more than a diamond.
There are 3.7 million school teachers in the USA. There are likely millions of more people who could do a competent job educating children after receiving appropriate training. But each teacher can only serve a few dozen students a year. Consequently, the ability to find one additional teacher is relatively easy and adding one additional teacher to 3.7 million teachers has a marginal impact on the overall task of educating children.
In contrast, there are 150 positions for starting players in the NBA. Each player has the potential to provide a service (i.e., entertainment) to millions of people. Someone who can play exceptionally well has the ability draw in more than the average player. The supply of Kobe Bryants (or his equal) is very scarce and the contribution of a Kobe Bryant to the overall business is very large.
The divergence in salaries between teachers and basketball players is not because someone is more important and not because someone’s labor meets a more important need. It is driven by the supply of labor to meet each type of need. Furthermore, reducing the size of NBA salaries will not lead to an increase in teacher’s salaries. The dynamics of a relatively large supply of potential teachers with each additional teacher having only a marginal impact on the overall service, still doesn’t change.
In summary, then, the price of goods and labor is set by the collective value of the community as it interacts with the objective supply of these things. The fact that human beings have intrinsic value does not mean their labor has intrinsic value.
Furthermore, and this is key, the market system is the only mechanism we have that directly connects what gets consumed with gets produced in real-time. In the past, price was set by custom, some notion of intrinsic value, or to suit the appraisal of some official. These methods, as well as communist models that seek to eliminate the market, require some method of conjecture that inevitably leads to chronic oversupplies and shortages. The market system is unique and vastly more efficient in coordinating economic activity between countless participants.
Now it would be very easy to stop here, singing the praises of market exchange. Many do. But there is much more that needs to be said.
Markets are a poor substitute for face-to-face community where people are known to each other and can coordinate economic decisions incorporating personal knowledge. For instance, suggesting that all family interaction be conducted on a market basis is an inferior form of family decision-making. But once communities began to grow beyond a few dozen people (more than 100 probably stretches the limit), it is humanly impossible to maintain intimate connections. Markets allow for coordinating behavior between countless strangers.
Markets are a remarkable human achievement but markets are far from perfect. Ideally, markets have complete transparency, participants have complete mobility, and there is no coercion. These qualities never perfectly exist. There are some circumstances were markets do not work well at all.
Public goods - Weather forecasting … incorporating satellites, radar, countless weather monitoring devices, computer technology, etc. … provides a great benefit to a whole community. But if one person specializes in this work, everyone benefits for free and all the cost ends up on the one specialist. The practical way to overcome this is to assess a levy to the whole community to cover the costs.
Market power - Sometimes there is inordinate market power in the form of monopoly (one seller, many buyers) or monopsony (one buyer, many sellers). Those with the market power can distort the price of goods or labor because they know the other party has no alternatives.
Externalities - This is where part of the cost of a transaction falls on someone external to the transaction. When a factory dumps pollutants in a river, it degrades the river’s use for people who live downstream. The people downstream end up bearing part of the cost of a transaction between the factory owner and the factory’s customers, to which people downstream had no say or benefit. Alternatively, when my neighbor hires someone to landscape his yard, he increases the value of my home. His aesthetic improvements spill over to the value of my property. There is likely some measure of positive and negatively externalities to almost every transaction. They are incidental in most cases but in some cases they seriously distort valuation.
Information Asymmetry - Sometimes one party has better information than the other just by the nature of the product or industry. That can lead to the less informed party making an erroneous valuation relative to what they thought they were getting.
Even with a world of perfectly virtuous people, the market alone would be insufficient at managing our economics processes. But it is equally true that we could have nothing approaching the modern world without robust market exchange. If we all lived in self-contained face-to-face communities of a few dozen people, we might know each other well enough to manage our economic issues without prices, or even without currency. But when we talk about cooperation beyond face-to-face communities there has to be dynamic information loop and the market uniquely meets that need. Critics of the market are quick to point out market limitations. Fair enough. But unless the critic can offer an alternative method by which a dynamic economy can function, then she is not serious about economics or justice.
So summarizing to this point, human beings are made in the image of God. As such, we have intrinsic value apart from any economic consideration. Our labor and the goods we produce have instrumental value and that relative value is set by the community through exchange in the market place, incorporating subjective and objective information into a real-time feedback loop. The market is far superior to the alternatives in setting value but it is far from perfect. That means there is “noise” in the feedback loop. But from the standpoint of Christian ethics, market imperfection isn’t the only source of noise in the market. (continued)
Well, I think I might have met his match. She's called Deirdre McCloskey. ...
... McCloskey on the other hand, who is meant to be the conservative one, has the zeal of a revolutionary. She describes herself as an ex-Marxist, Christian libertarian. She is the most notable transgender economist in the world (I can’t recommend strongly enough Crossing, A Memoir, her moving account of her journey from Donald to Deirdre.) She is an entertainer and storyteller; one of the few serious economists who is as likely to quote the poetry of Robert Burns in support of an argument as she is to quote wheat prices in the 15th century.
But forget the characters. It is the intellectual contrast which gets to the heart of the debate between those who worry about in-equality and those who don’t. ...
... McCloskey, by contrast, has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’
That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists. ...
... The answer to that question determines what should be done about inequality. Piketty wants a progressive tax on wealth to prevent high returns entrenching the power of the richest. McCloskey, needless to say, is not keen on redistribution. Taking from today’s rich may give you a one-off uplift in the incomes of the poor of, say 30 per cent, she says; but that is nothing to the uplift from innovation and growth, which can double incomes every generation.
So much for the central disagreement between them. Here’s my problem. Many people with strong views on inequality consciously or unconsciously think of this as a binary choice: profits go to either a deserving or undeserving rich, depending on your view. It’s all about capital, or all about wealth creation. But I struggle to see it that clearly. I’d like to know how much of the return on capital that so concerns Piketty is actually income earned from entrepreneurial wealth creation. I’d also like to know how important that income is to innovation.
Piketty is well aware of this vulnerability in his argument. ...
She is admirably pure in her view, but is it as black and white as she portrays it?
Bill Gates or Liliane Bettencourt? They co-exist, of course, and have both had a pretty good time of it in recent decades. The question is which one better characterises the very rich. And also which risk you would rather take: taxing the Bills at the risk of deterring them from creating Microsofts? Or not taxing the Lilianes, at the risk of letting them become ever wealthier and more powerful while sitting at home doing nothing?
I know that the 99 per cent of the population have no difficulty coming to a view. I’m in the sad 1 per cent, who can see both sides.
Very interesting article! I lean more in McCloskey's direction. I think the impact of innovation is invisble to so many and it is radically underappreciated by others who acknowledge it. But I also share the ambivalence so well expressed by the author in this article. Here is a clip of McCloskey:
Economist: Not so fair trade
BUYING ‘Fairtrade’ coffee is not really helping the very poor, new research suggests. By comparing living standards in Fairtrade-certified producing areas in Ethiopia and Uganda with similar non-Fairtrade regions, four development economists from the School of Oriental and African Studies (SOAS) in London found that Fair Trade agricultural workers often earned lower incomes.
After four years of fieldwork in the coffee, tea and flower sectors in Ethiopia and Uganda, where they gathered 1,700 survey responses and conducted more than 100 interviews, the SOAS researchers found people living in ordinary rural communities enjoyed a higher standard of living than seasonal and casual agricultural workers who received an apparently subsidised wage for producing Fairtrade exports. Women’s wages were especially low among producers selling into Fairtrade markets, according to the researchers. ...
... PS: The Fairtrade Foundation has published a lengthy reply: "We note the innovative methodology and large sample size that SOAS’s research project has used to answer its three research questions, only one of which focuses on Fairtrade. We also note however that the study has not sought to evaluate the impact of Fairtrade’s model and interventions as it has not followed an impact evaluation methodology."
I began this essay noting that humans have intrinsic value. However, goods (and the labor entailed in making them) do not. Goods and labor have instrumental value. Let us explore this in more detail. Two clarifications before we begin.
First, I want to distinguish between goods and natural resources. Goods are the things we use to meet our particular wants and needs. Resources are the materials, energy, plants, and animals we form into goods. Nearly all goods have an element of human labor contributing to their value. While there is an abundance of natural resources, the quantity of goods is directly connected to the productivity of humans transforming natural resources (and more recently data) from less useful forms into more useful forms.
Second, there is a difference between the value of any particular good to a particular individual, and the value of a category of goods to the community. The value attributed to a stapler may vary considerably from individual to individual at any given moment but the market price tells us the collective value the community places on particular goods at a particular time. (More to follow.) For our purposes here, I’m concentrating on the communal value as reflected in a market price.
So what value do goods have? It has long been a confounding question. Some people have said that goods have intrinsic value and that this value can be stated in terms of a market price. Other people have seen more subjective factors at work, believing the more important a good is the more value it should have. Still others have observed that the supply of a good is key to understanding its value.
Many thinkers have wrestled over the years with making a sense of the subjective and objective aspects of value but not to very satisfying conclusions. Since most economies prior to the 17th Century were relatively stagnate and trade played a smaller role, life seemed to move along just fine without precision of thought in this area.
From the late Middle Age of Europe on into the early stages of industrialization, thinkers began to appreciate that the value of goods and labor was not as fixed as previously thought. Economic data began to be collected and scrutinized. Accelerating Change in productivity, coupled with the Enlightenment’s push to make rational sense of human affairs, pressed thinkers for a more precise understanding of how value is determined by 18th Century. Thinkers, most notably Adam Smith, came to see that labor was the key issue. One hour of labor by any person was seen as mostly interchangeable with an hour of labor by any other person. An hour of labor was understood to have intrinsic value. Price was not inherent in the thing itself; rather the price of a good was set by the amount of labor applied to creating it. This was the labor theory of value. (Both Adam Smith and Karl Marx subscribed to this idea.)
However, by the late Nineteenth Century a profound reality began to dawn on thinkers: The communal value of a good is whatever price the community of buyers and sellers agree to through exchange. This was not a new idea. Thinkers of the past had stumbled upon it. Several of the Scholastic philosopher-theologians had written about this, dating back to Thomas Aquinas in the 13th Century, but they seemed to have little influence on economic affairs.
This revolution in understanding meant that goods, and the labor that produced them, have only instrumental value. Instrumentality is a subjective judgment. But these more recent theorists understood that there is an objective reality that influences a good’s value as well. The general price of a good is determined by the intersection of two variables:
This means that the value is dynamic. It is subject to the changing needs and wants of the community, as well as to the quantity of goods available for use. But when we understand the value of things in this way, something even more remarkable occurs. Prices (i.e., value stated in terms of a currency) form a continuous feedback loop between buyers and sellers. Why is that important?
On any given day each individual has a fixed number of hours, a fixed level of technological understanding, and a fixed amount of resources available for producing goods. The latter two can be altered over time but on any given day they are all fixed. A community’s productive capacity (whether a village or the entire planet) is the sum of these individual capacities. Priorities must be set because capacity is limited. Otherwise, we will end up with too much of some things and too little of others. Material resources and labor will be wasted and needs will go unmet. This is a challenge for any society.
Management of economic activity may not pose a particular challenge in a face-to-face community of a couple dozen people. If there is community solidarity, each individual is likely known to the others. All individual needs can be known and considered. It will be clear how well each person is working, who is incapacitated, and who is best suited for which jobs. It will be known who needs what and how much.
However, this natural information system breaks down when communities grow much beyond a few dozen people. There is no way to be well acquainted with hundreds of people, much less thousands or millions. Not only is it beyond our capacity to know so many people but each of us has economic priorities that are constantly shifting. Discerning and planning for the community becomes unmanageable. Prices derived through market exchange become the real-time communication channel through which we are able to coordinate our work with the world beyond our face-to-face communities, to meet each other’s needs. Distorted prices mean distorted communication.
Imagine we own a factory that makes toy wagons. Two workers make wheels. The workers are equally earnest employees who work the same number of hours each day. But one worker meticulously crafts perfectly square wheels while the other worker with equal diligence makes perfectly round wheels. Are we to say that each hour of labor has intrinsic value and that each should be compensated the same? No.
The labor of the worker making round wheels is clearly offering something of value that the other worker is not; to us as the employer and ultimately to the consumer. While the square versus round wheel example is obviously an extreme case to make a point, the issue is that one hour of labor is clearly not identical to any other hour of labor. Compensating the workers according to the value of their work motivates them toward activity that the community values and away from activity that it does not. The maker of square wheels has an incentive to alter her labor to provide products that bring more value to others, while the maker of the circular wheels has an incentive to get ever better at the craft and earn more.
If a genuinely open market exchange happens, then the price of goods and labor are going to reflect the priorities of the community. Attempts to distort the prices up or down will lead to some distortion of what the community has said it values in the favor of some individual or group, possibly leading to waste and poorly meet needs.
Now please note that I began the first sentence of above paragraph with “if.” That is a huge “if.” Furthermore, are we saying that the community always values all things correctly? And what about those who simply can’t offer labor that earns them enough to sustain life? All good questions and we will come to them. But we first need to finish the discussion of value. I’ve opined on the subjective value component. Now we turn to the objective aspect of value. It adds a significant wrinkle to our discussion.
On what basis should people be compensated for their work? Economists say the value of labor is a function of supply and demand. Wages should correspond to the economic value of work. Theologians often object. (Note: We are all theologians but here I’m referring to those formally educated in theology.) They say it dehumanizes people. People are not faceless cogs in a machine to be differentially valued based on their economic contribution. Everyone is equal in God’s eyes. Income and wealth should be shared equitably.
What do you think? How do we sort this out? Is one right and the other wrong? My short answer is that human beings are created in the image of God. We have intrinsic value that transcends any instrumental purpose we might serve. The goods we produce do not have intrinsic value. Value is set by the interaction of a community’s subjective desire for a good and the good’s objective availability; so also with an hour of labor. God sets the value of people while the community sets the value of particular types of labor. The value of a person’s labor is not an indicator of a person’s intrinsic value. And that leads to some important theological and economic challenges. Let us unpack this.
Humans are unique. We have a hybrid existence. On one side, we are like creation and unlike God. We are material beings. We share much in common with other mammals. We have bodies subject to the laws of thermodynamics, just like the rest of the material world.
On the other side, we are like God and unlike creation. We are spiritual beings. We have the ability to love, to see beauty, to reason, to create, and to discern morality and meaning. We are meant for eternal life.
We are a body and spirit fusion. These two realities must be held together. We are not spirits inside of bodies. In the end, we believe in “the bodily resurrection,” not transformation into spirits. In the language of Genesis 1:27, we are the image of God … eikons … in the created order. Not eikons in the sense of lifeless statues, but rather as God’s agents, discerning and acting in ways that are so integrated with God that God’s character and purpose are evidenced through us.
As agents, we have a mission. Genesis 1 and 2 give us the grand stories of creation that highlight that mission but due to our preoccupation with what these stories might say about origins we often seem to miss the point. I’m persuaded that origin is not the driving subject of these stories. The purpose of these stories is to articulate God’s sovereignty and our mission.
I think the best way to understand Genesis 1 and 2 is by analogy. Imagine creating a garden in your backyard. There are two phases. First, we take a plot of ground that is “formless and void” of the vision we have in mind. We remove rocks and weeds. We loosen the soil. We might add some fertilizer. We plant some seeds. Maybe we put a protective border around the garden and put up a fence to keep animals out. Having done so, we are done with the first phase and we “rest” from “creating” the garden. But the garden is not done.
In the second phase, the garden must be continually weeded. The fence must be monitored and repaired as needed. Plants must be protected from hard freezes or hail. There will be occasional watering. Some plants may need regular pruning and others will yield fruit that periodically needs to be harvested. Only when the garden has come to full flourishing can we say the garden is complete.
Genesis 1 and 2 are phase one of God’s garden project. When God is finished creating, Genesis says God rested. Phase 1 was done. Now it was time to enjoy bringing it to fullness. In keeping with this narrative, Hebrews 4:1-11 says that God has been living in this seventh day of rest since creation. But this second phase work is not work God has chosen to do alone.
At the end of the sixth day of creation, God creates eikons of God’s self, and gives them the mission of exercising dominion over creation. Despite various perversions of “dominion” as a right to do as you please, the idea here is that human beings are God’s agents participating with God in realizing God’s vision. I will not unpack this all here, but in view is humanity as God’s vice-regents over creation and creation as God’s temple in which we serve as priests. Human beings are intended for loving communion with God as they and God go about the work of bringing “the garden” to full potential.
Now I do not understand the early chapters of Genesis to correspond to historical events. They are stories that relate profound truths about God’s vision and mission, and humanity’s role in that vision and mission. In short, God is sovereign over creation and human beings are God’s image-bearing agents in the world, participating with God and each other to realize God’s ends. Genesis 3 and onward reveals humanity’s sin and failure to embrace this mission. The biblical narrative is the story of God’s redemption and reclamation of that vision, even as God continues to “work the garden” and bring us into that work. Revelation records that in the end, “You have made them [redeemed humanity] to be a kingdom and priests to serve our God, and they will reign on the earth." (Rev 5:10) Priests and vice-regents.
Let us return to the question of value. Value is subjective. Nothing has value without someone to do the valuing. This is true in all cases but one. God alone has intrinsic value. No one can set God’s value. "There is one God who is father of all, over all, through all and within all." (Eph. 4:6) All value ultimately extends from God.
What the biblical narrative tells us that God values creation but humanity is valued in a way that is apart from the rest of creation. Human beings are God’s image bearers, springing forth from the love and communion of the Trinity. Human beings have immeasurable value in God’s eyes. Because God values human beings, we have intrinsic value by extension. It is God’s intention that human beings, individually and corporately, should thrive. Consequently, the measure of a shalom-filled community is one where all of the members thrive together. All human beings are precious in God’s eyes. As Christians thinking theologically and economically, a key end has to be a community where all have resources and opportunities to thrive. Sharing in material abundance is a component of that vision. But it is not the only component. …
Are the rich getting richer and the poor getting poorer? Stories about inequality typically talk about how the rich, especially the top 1%, are seeing their incomes grow rapidly while people at the bottom are seeing their incomes stagnate and drop. A gap is widening between the top and the bottom. Is that true?
The Federal Reserve Bank of Minneapolis has just published an interesting report that studies the relative income performance of households from 1967-2012. It compares households at the 95th, 50th, and 20th percentiles of the income distribution. The reports distinction between two types of income is revealing: Market income and disposable income.
Market income (pre-tax and pre-transfer income) is what we typically see reported. But when we adjust for taxes (which substantially decreases the income of the wealthy) and add in transfer income like social security, unemployment, and welfare payments (which substantially increases the income of people in poverty) we get disposable income. Disposable income paints a much different picture than market income. Let's look at two important graphs:
The top line in the chart is the ratio of market income (pre-taxes and transfers) of households at the 95th percentile as ratio to households at the 50th percentile. For example, it appears the households at the 95th percentile made 2.7 times as much as those the households at 50th percentile in 1967. By 2012, they were making about 3.6 times as much. The bottom line tells a different story.
Disposable income (after taxes and transfers) follows a similar pattern until about 2000 when the ratio leveled out at just below 3.0, and has remained between 2.9-3.0 ever since. That means that despite market income having risen faster for the 95th percentile compared to the 50th percentile, inequality in terms of what people have to spend at the end of the day hasn't really changed for almost fifteen years.
Then there is this chart:
This chart shows the ratio of the 50th percentile to the 20th percentile. Note the ratio of market income continues to widen with each business cycle. The recessions, shaded gray, result in spikes of unemployment. That expands the ratio and then the ratio contracts a little as employment improves. The sharp jump at the end correlates with very high unemployment and underemployment.
But the striking thing is the disposable income line. It is flat from 1983 onward (until a slight increase since the 2008 financial meltdown.) There has been virtually no change in inequality between the 50th percentile and the 20th percentile for thirty years!
1. The debate raging around inequality typically points to the widening gap in market income between the top and bottom. More transfer of wealth is proposed to balance out the income people receive. Market income and disposable income are conflated. If a household with a market income of $15,000 gets transfers of an additional $15,000, for a total of $30,000 in disposable income, they still have a market income of $15,000! Pointing to market income statistics as an indicator that distribution of income is insufficient is erroneous. By this reasoning, a $15,000 household could get $1,000,000 in transfers but they would still be "living in poverty" because transferred income is not being considered in the income calculation.
2. This analysis focuses only on households at the top 5%, not the top 1%, where so much of the debate has been. For reasons reported in the article, the data did not lend itself to a study of the very top 1% or 0.1%. The ratio of disposable income of the very top to lower percentiles may be increasing. But it is certain that the ratio of disposable income is much lower than market income.
3. This study seems to suggest that public policy has been doing a very good job of preserving disposable income ratios for many years. We may want to debate if these ratios are just but they are not widening.
4. The fact the market income ratio continues to widen, meaning it takes evermore transfers to keep disposable income constant, suggests that low wages and unemployment, not insufficient transfers, are becoming the problem. Left leaning figures like Robert Reich argue that decline of union bargaining and failure to raise the minimum wage are the culprits. Companies aren't paying employees relative to their economic contribution. That leaves taxpayers to subsidize the work that these companies get from low wage workers. Other economists suggest the labor market is more efficient then that and that most employees are being compensated relative to their economic contribution. While very modest minimum wage increases are likely without much impact on the total labor market, substantial jumps in the minimum wage are likely to lead to automation and off-shoring, thus more unemployment and even more need for transfers than the alleged subsidization of low-wage workers today. Who knows exactly where the truth lies.
We do know that technology and the economy is rapidly changing. That means we need a workforce with the human and social capital to take advantage of such changes. Strong families and educational systems are central to developing that capital and we know these institutions have been weakening for some time. That doesn't help the market income challenge.
Bottom line, disposable income inequality is not getting worse for the bottom 95%, and it seems likely that whatever inequality is growing between the top 1% and the rest is substantially less than the market income widely reported. Maybe present distributions of disposable income are unjust. That is worthy of debate. But that is different from saying inequality is growing. Market income inequality continues to rise and what is unclear is if there is a policy fix for this or if this is market income inequality is inherent in a post-industrial and digital economy.
It’s grotesque, but income inequality isn’t as harmful as we think. ...
... But as New York Times economics writer Eduardo Porter noted recently, claiming that wealth inequality is unambiguously harmful is more about ideology than evidence. He cites the struggles of Harvard scholar Christopher Jencks, a leading chronicler of the middle class, to complete a planned book on income inequality. After years of research, Jencks was convinced that the only true statement about whether and how income inequality harms society is “It’s hard to tell.” Progressive economist Jared Bernstein has also found that we can’t prove the assumption that inequality leads to slower growth, given available evidence. It may be true, Bernstein wrote, but we do not have enough concrete proof.
The work of Jencks and Bernstein complicates the neat narrative of robber barons and a new Gilded Age harming the middle class. Because those views lack black-and-white simplicity, however, they tend to receive less attention. Which is a shame, because they’re probably closer to the truth.
The assumption of a causal link between excessive pay at the top and low growth and stagnant incomes fuels the drive to reframe the tax code toward greater redistribution. There is a strong moral case for that, especially insofar as massive gaps between the rich and the rest can be so insurmountable as to severely dent the idea of equality enshrined in the founding of the U.S. That said, even aggressive redistribution will not fundamentally solve what now ails us. ...
... The top 100 CEOs in the survey took home a total of $1.5 billion. That’s rather nice for them, but redistributing, say, $1 billion of that would do almost nothing to help the 100 million people at the bottom of the economic pyramid in the U.S. Even if you included upper management and got to, let’s say, $100 billion, the extra income distributed across American society would barely improve living standards. Boards could mandate that, say, Larry Ellison of Oracle should be less wealthy so that Oracle employees could be more wealthy, but Oracle employees are already on the winning side of the global economic equation. They are not the ones who need help.
Let’s say then that you created an inequality tax, as Robert Shiller of Yale has proposed. That could certainly generate some extra billions, which could then be redistributed. But even there, the super-rich would only become slightly less super-rich, while those whose incomes are stagnating or those tens of millions underemployed and caught in a web of structural unemployment would see marginal improvement at best. In short, measures to reduce inequality might be modestly helpful, but they wouldn’t solve much. ...
This piece highlights once again that for those truly interested in working for a just and prosperous world you have to move beyond populist "bumper-sticker" economics.
The top 1% versus the 99% is emerging as popular topic once again. I wonder how many people genuinely reflect on who makes up the 1%. My perception is that many people see the 1% as a highly cohesive static segment of the population. It isn't.
Social scientists use two different types of analysis when analyzing data about populations. There is a cross-sectional analysis. These studies are a snapshot-in-time look at a given population. There is also longitudinal analysis. These studies measure the characteristics of a population over time. Cross-sectional studies are like looking at a photograph and longitudinal studies are like looking at a series of photographs complied together to give a motion picture.
Let's say we had unfettered access to IRS data. We could analyze the income of each person for each year over many years. A cross-sectional analysis would allow is to see who was in the top 1% in, say, 2010. But how many of these people are truly wealthy in the sense of an ongoing lifestyle of riches and influence? There is no way to know from this analysis. Longitudinal analysis is needed.
So let's imagine two extremes over a ten year period. At one extreme is the idea that income is totally random. In that case, we would see no pattern in who makes up the top 1%. At the other extreme is the idea that the people in the top 1% are the exact same people that were in the top 1% ten years earlier, with a few adjustments for dropping people who died and adding people, mostly heirs, who took their place. The populist references to the 1% suggest something much like the latter is reality.
Mark Rank, professor of social welfare at Washington University, is one of the authors of a new book, Chasing the American Dream: Understanding What Shapes Our Fortunes. He wrote a piece in New York Times last week called From Rags to Riches to Rags. Based on the research in the book, here is some of what he wrote:
... Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking.
It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.
Yet while many Americans will experience some level of affluence during their lives, a much smaller percentage of them will do so for an extended period of time. Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.
It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. (This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60). ...
... Likewise, data analyzed by the I.R.S. showed similar findings with respect to the top 400 taxpayers between 1992 and 2009. While 73 percent of people who made the list did so once during this period, only 2 percent of them were on the list for 10 or more years. These analyses further demonstrate the sizable amount of turnover and movement within the top levels of the income distribution. ...
... Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. ...
Other studies I've read show that even among those who make a high income for a string of years, it is difficult to stay at the top for more than a generation or so. Children rarely repeat the type of income production their high achieving parents did. Studies of corporations show that is exceedingly difficult for a corporation to dominate top spots on the corporate hill for more than a decade or two. Once decline sets in, only a small minority are able to recover past glory. We can probably count on one hand the number of corporations that have recovered three times in the past century or so. The point being that top spots in income for individuals and for corporations is more precarious than is often appreciated. And it is also true that there is considerable variation income over the lifetime of individuals found in the bottom 99% in any given year.
Raging against a monolithic unchanging 1%, sucking up all the wealth and condemning the masses to a perpetual Dickensian dystopia, is way over the top, but it makes for pithy bumper stickers and effective sloganeering for certain ideological camps. Genuine interest in understanding and addressing economic challenges ... unemployment, stagnate wages, automation ... requires a significantly more nuanced approach.
Greg Mankiw is an economist at Harvard and the author of economics textbooks. He recently wrote and excellent piece in the New York TImes, When the Scientist Is Also a Philosopher. I really appreciated this excerpt.
...We economists often have only a basic understanding of how most policies work. The economy is complex, and economic science is still a primitive body of knowledge. Because unintended consequences are the norm, what seems like a utility-maximizing policy can often backfire.
So, what is the alternative? At the very least, a large dose of humility is in order. When evaluating policies, our elected leaders are wise to seek advice from economists. But if an economist is always confident in his judgments, or if he demonizes those who reach opposite conclusions, you know that he is not to be trusted.
In some ways, economics is like medicine two centuries ago. If you were ill at the beginning of the 19th century, a physician was your best bet, but his knowledge was so rudimentary that his remedies could easily make things worse rather than better. And so it is with economics today. That is why we economists should be sure to apply the principle “first, do no harm.”
This principle suggests that when people have voluntarily agreed upon an economic arrangement to their mutual benefit, that arrangement should be respected. (The main exception is when there are adverse effects on third parties — what economists call “negative externalities.”) As a result, when a policy is complex, hard to evaluate and disruptive of private transactions, there is good reason to be skeptical of it. ...
This is the point I've tried make on so many occasions. My opposition to many policies is not so much grounded in ideological fidelity as it is in epistemological humility. I have severe reservations about the proponents' ability to accurately understand secondary and tertiary consequences that can result from massive interventions.
Back in January, Oxfam published a statistic saying that 85 people have more wealth than the bottom half of the world population. It has become a widely circulated stat in the debate about inequality. (Forbes recently countered that the number is actually 67 people.) But what to do these numbers mean? I know full well that when most people hear “wealth” they envision how much money and stuff people own. That is incorrect. These are assets. Wealth is your assets minus your liabilities (i.e., debt). What difference does that make?
Felix Salmon, a writer at Reuters, did some digging into the Oxfam report to find the data upon which they based their claims. (See: Stop adding up the wealth of the poor) It comes from Credit Suisse’s 2013 Global Wealth Databook and here is a graph Salmon clipped showing another take on the data:
Notice the top left corner of the chart. It shows that 7.5% of North Americans are in the bottom 10%. If you look further down you will see that virtually no one from China is. How is that possible?
Take two hypothetical people:
1. American Physician – A new physician with a salary of $150,000 a year. She has $125,000 dollars in student loans and a car with a $25,000 loan. That totals to $150,000 of debt. She is renting an apartment. Her total assets including cash, car, and other items equal $50,000. That means her wealth is a -$100,000.
2. Chinese Peasant Farmer – A Chinese farmer who earns the equivalent of $3 a day, or $1,400 a year. He has managed to save $50 in cash and he has property worth about $250. He has no debt. His wealth is $300.
The physician would likely be found in the lowest decile while the farmer will be in the third or fourth decile. By Oxfam’s reasoning, the farmer is much wealthier than the physician! That is technically true but does this have any correspondence with what most people think of when the think of "wealth?"
Just as advanced economies have upper income levels that far outstrip the upper levels of emerging nations, so do they also have people with huge sums of net debt that far outstrip what people would have in emerging nations. Consequently, people from more advanced economies are going to dominate at either end of the wealth distribution. (You see evidence of this in the chart by the higher percentages at the extremes for North America, Europe, and Asia-Pacific excluding China and India.) People who are unable to earn or borrow much are going to be more toward the middle of the distribution. But as with the physician, high debt doesn’t necessarily mean deprivation.
Wealth is a useful measure for some purposes but if we want to get an accurate picture of economic well-being we most also include measures like income. Particularly important is consumption per capita because “income” doesn’t include transfers and non-cash assistance. Statistics often show people routinely consuming as much as double their cash income because of this discrepancy. Consumption tells much more about how people actually live. In short, Oxfam’s stat is great for sensational headlines but does little to educate us about the challenges people face.
Robert Reich’s increasingly well-traveled observation is that “The 400 richest Americans now have more wealth than the bottom 150 million of us.” But think about what that means. What is “wealth?” I routinely sense that most people incorrectly think this means how much money you have, or much stuff you own including money (i.e., assets.) No.
Wealth is the sum of your assets minus the sum of your liabilities. Consequently, the person with a $300,000 home, $25,000 car, and in other assets of $50,000 (total assets of $375,000), and with a $275,000 mortgage, $25,000 car loan, and $80,000 in student loans and other debt (total liabilities of $380,000) has a net worth (i.e., wealth) of -$5,000. The homeless person living under a bridge with no assets and no liabilities is wealthier than this person. Approximately 1 in 5 households have negative net worth, which means your new born baby is wealthier than 60 million Americans.
The fact is that most of us start out as young adults with very little wealth (i.e., assets minus liabilities). In fact, I suspect many high school grads are wealthier than many recent college grads because college loans create a negative net worth for many. Wealth builds over the years through saving and investment. Someone with a modest income who is 55 years old and has been regularly saving and investing well likely have hundreds of thousands of dollars in wealth, while many 25 year olds with professional degrees and good incomes will be at break-even or even have negative wealth. Wealth inequality is part of the natural process and it will always be considerably greater than income inequality.
Reich’s statement may be true but it strikes me as sensationalist without more context. A great many of the 150 million people at the bottom have considerable assets but also have much debt. Some in the top 150 million have modest assets but little debt. I suspect Reich’s statement gives the impression to many that half of America lives on just a few dollars a day. I’m just saying we need to be more clear in our thinking.
Marginal Revolution University: Does Fair Trade Help?
Economist Tyler Cowen gives his take on the impact of Fair Trade coffee. For a more detailed analysis I'd suggest Victor Claar's Fair Trade? Its Prospects as a Poverty Solution.
I know many activists are passionate about Fair Trade coffee but I don't see their certainty about the benefits reflected by economists who study the practice. I suspect that same could be said for most commodities. (It may different with non-commodity efforts like hand-crafted goods.) But generally speaking I think the advice to buy coffee at the best price and give the excess you would have paid for Fair Trade coffee to a good charity is good advice.
Huffington Post Business: Faith and Business - Michael Jinkins
The church has a knack for depreciating the vocations of the laity. Well, perhaps not all vocations of the laity. The church routinely blesses vocations like the helping professions and education, especially if they are in the not-for-profit realm. But the church is ambivalent, at best, when it comes to blessing the vocations of those folks whose business is, well, business. I find this troubling, since the overwhelming majority of Christians I know are working in the business world just making a living.
The problem the church has with business has as much to do with an ignorance of economics as a flawed theology of vocation. When pastors and theologians begin talking about economic matters, I often cringe, not only because of their lack of knowledge in the fields of financial and economic matters, but because of the thinness of the theological reflections. Usually such conversations reflect little more than the individual's biases dressed up in theological language to dress down someone else's interests. ...
Michael Jinkins is the president of Louisville Presbyterian Seminary. I can't tell you what an encouragement it is to hear a Presbyterian seminary president come forward and raise this issue. I have made the case in public and in private for just this emphasis for nearly ten years as I have served the denomination at the national level. I have made the case that church renewal begins when people begin to see the connection between what they do in their daily lives and God's mission. I occasionally caught an ear here and there but largely what I experienced was acute indifference. To hear the president of one of our seminaries acknowledge the deprecating (and I will add "demonizing" in some contexts) attitude toward people in business and lack of economic acumen is such an encouragement. Blessings on you, Dr. Jinkins, and may your tribe multiply among our denomination's hierarchy.
Jinkins mentions Presbyterian John Knapp's (now president of Hope College) How the Church Fails Businesspeople (and what can be done about it). I blogged through the book two years ago both here and at Jesus Creed. The index is here.
If you are interested in a couple of books about basic economics from a Christian perspective I would recommend Bulls, Bears and Golden Calves: Applying Christian Ethics in Economics, written by John Stapleford, a professor of mine when I was at Eastern University.
Also, Economics in Christian Perspective: Theory, Policy and Life Choices by Victor Claar and Robin Klay.
There is a lot of talk about raising the minimum wage to $10.10. I sense many advocates believe this will lift countless millions out of poverty. Is that true and is the minimum wage a central factor in reducing poverty?
I'm not advocating for or against the minimum wage. The Congressional Budget Office did a review of the economic literature and concluded that, on balance, a raise to $10.10 would have a net positive impact. So let's go with that for now (more below). My question is about the minimum wage as a poverty fighting tool.
There were 46.2 million people below the poverty income threshold for income before taxes, transfers, and noncash benefits. By definition, the minimum wage will only have in impact on people earning a wage (and their dependents). So let's break down the overall poverty number. Keep in mind that being in the "labor force" means being employed or actively looking for work.
Here is data from two government reports, A Profile of the Working Poor, 2011, from the Bureau of Labor Statistics and Income, Poverty, and Health Insurance Coverage in the United States: 2011, from the Census Bureau. (I'm using 2011 data because it is the most recent year for which all the below data exists.):
Only in this remaining group of 4.9 million workers do we have the possibility of low-wage workers employed the full year but not making enough to get above poverty. But this group would also include people who may have had a wage sufficient to put them above the poverty level but were only employed for, say, thirty weeks. The number of people working the full 52 weeks is likely small.
Now let's add another layer. The Bureau of Labor Statistics also published Characteristics of Minimum Wage Workers: 2011.
Less than one quarter of minimum wage workers live in households that are below the poverty threshold, just under 1 million people. Note that above we said there were 4.9 million workers in the labor force for at least 27 weeks. Assuming all the 1 million worked the full year (grossly unrealistic) then only one fifth of the 4.9 million would meet the image of the worker earning a minimum wage for 52 weeks. The great majority of the 4.9 are people who worked more than 27 weeks but less than 52.
Also keep in mind that two thirds of minimum wage workers earn more a year later, the median increase being 24% according to one study. That means one third are making at least $9.00 a year later.
So here is the bottom line in dealing with poverty and employment. There were 9.4 million working adults who weren't in the labor force at all and another 2.4 million who were not in the labor force for half of the year. That is 11.8 million people. We add to this 1.6 million who were in the labor force but never found work for a total of 13.4 million people. Add 24 million dependent or disabled people in poverty to 13.4 million who weren't in labor force or who never found work, and you have 37.4 million people of the 46.2 million (81%) for whom the minimum wage has virtually no direct impact (though a small number of dependents would benefit from having a breadwinner with an increased wage.) For the remaining 8.8 million working age people in poverty the challenge appears to be insufficient hours, not the hourly wage.
Who benefits from the minimum wage is a complex calculation. Clearly it would have a positive impact on people making between $7.25 and $10.10, although to a diminishing degree as you go to the top end of that range. There would be some residual benefit to some people making more than $10.10. But here are some key observations from the CBO. There would be a $31 billion increase in wages but on 19% (about $6 billion) of this would go to poverty households while 30% (about $9 billion) would go to families who make three times the poverty level. Furthermore, CBO estimates 900,000 jobs that otherwise would have been created will not exist.
Employment is by far the key issue relating to poverty. Full-time work for 52 weeks, even with low starting wages, is the key to staying out of poverty for all but a tiny fraction of the population. The meme of the full-time minimum-wage worker working 52 hours a week while living in poverty is way overblown. The main challenge is not enough work, not too little wages. And to be sure, living just above poverty is not living in luxruy. But there are programs like Earned Income Tax Credits that could be expanded to help these low-income workers. CBO says that an increase to $10.10 is a good thing on balance. Fine. Let's go with that. But let us stop pretending that this is some monumental triumph for social justice and the elimination of poverty. Let's get some economic growth and start creating jobs. Let's invest ourselves in helping people in poverty aquire the human capital they need to flourish in a rapidly changing economy.
Below is a presentation by Bjorn Lomborg at Creative Innovation 2013: Asia Pacific. I think this is a remarkable presentation. First a few remarks.
How much can the global economy grow? That is a big issue in economics and in environmentalism. Clearly the earth has a fixed quantity of resources. If the economy grows exponentially, then one day we run out of resources and the world system collapses. We must limit growth if we are to survive. It seems so plainly obvious. Limits to Growth was an attempt to quantify just how this all played out and to advocate for changes.
My Dad was a professor and research chemist during my childhood. He was intensely focused on energy. Limits to growth conversations were in the ether all around me during my junior high, high school, and college years in the 1970s. I volunteered in the 1980 John Anderson presidential campaign, in part because he wanted to impose a $.50 a gallon gas tax that would get us off of petroleum and move toward nuclear and renewable fuels. Limits to Growth (LTG) was very much a product of the thinking of the 1970s mindset but its influence is still very strong today.
But the problem is that the LTG framing is spectacularly wrong! In the video below, Bjorn Lomborg unpacks why this is so. LTG focused on five factors:
Each of these was believed to be growing exponentially. Population was growing exponentially. It requires a certain amount of acreage to generate enough food to feed each person. Feeding this growing number of people will mean cultivating evermore acreage. Supplying basic goods to these people will mean exponential growth in industrial production, with an attendant rise in resource consumption and pollution.
What the scenario spectacularly overlooks is human innovation and substitution. For example, population is growth is slowing and will likely stop at between 10 and 11 billion in the second half of this century. The growth was a direct result of the life enhancing technology that caused a sharp decline in death rates. But birth rates took far more years to adjust. Thus, millions of children that would have died young in past eras were now becoming adults and having children. But overtime, the fertility appears to drop back down to the replacement rate and even lower in some places. People innovated.
Another example. The amount of agricultural land to feed one American stayed constant until about 1910, when 310 million acres were in production. Now if you went back in time and told Americans that the population would triple during the next century and asked them how much agricultural land would be needed they could easily tell you? An additional 600 million acres, or most of the land area east of the Mississippi. How many acres are in production today? 310 million acres, the same as 1910. Innovation and technology allowed us to become magnitudes more efficient in agriculture to the point that not only are we able to feed the additional Americans but we export food. This is called decoupling because the two variables of population and agricultural land use no longer move in tandem. Americans innovated.
Here is one chart from the video below that shows a similar development in world agriculture.
Even with population growth, the land needed for agricultural is projected to remain about the same, or a little higher by other estimates. More decoupling through innovation.
Then there is this recent chart. It suggests that energy consumption may be decoupling from economic output:
As Lomborg notes, innovation is the missing element in LTG. Through recycling of some non-renewable resources, using nanotechnology to redesign materials at the molecular level, and eventually substituting renewable materials for non-renewables, the possibilities for growth are inestimable.
There is a caveat here. As we innovate it is possible that we may not find it possible to innovate quickly enough on a particular challenge to avoid creating considerable hardship for segments of the human race at a particular time. I’m not suggesting we should be without caution, just that the limits idea is very flawed.
Here is the video. Enjoy:
Scientific American: A Happy Life May not be a Meaningful Life
Tasks that seem mundane, or even difficult, can bring a sense of meaning over time.
Psychiatrist and Holocaust survivor Viktor Frankl once wrote, “Life is never made unbearable by circumstances, but only by lack of meaning and purpose.” For most people, feeling happy and finding life meaningful are both important and related goals. But do happiness and meaning always go together? It seems unlikely, given that many of the things that we regularly choose to do – from running marathons to raising children – are unlikely to increase our day-to-day happiness. Recent research suggests that while happiness and a sense of meaning often overlap, they also diverge in important and surprising ways. ...
... Interestingly, their findings suggest that money, contrary to popular sayings, can indeed buy happiness. Having enough money to buy what one needs in life, as well as what one desires, were also positively correlated with greater levels of happiness. However, having enough money seemed to make little difference in life’s sense of meaning. This same disconnect was recently found in a multi-national study conducted by Shigehiro Oishi and Ed Diener, who show that people from wealthy countries tend to be happier, however, they don’t see their lives as more meaningful. In fact, Oishi and Diener found that people from poorer countries tend to see their lives as more meaningful. ...
... Participants in the study who were more likely to agree with the statement, “I am a giver,” reported less happiness than people who were more likely to agree with, “I am a taker.” However, the “givers” reported higher levels of meaning in their lives compared to the “takers.” In addition, spending more time with friends was related to greater happiness but not more meaning. ...
... It is clear that a highly meaningful life may not always include a great deal of day-to-day happiness. And, the study suggests, our American obsession with happiness may be intimately related to a feeling of emptiness, or a life that lacks meaning.
Fascinating article. It made me think of two guys talking about a friend who had bought a $1,000 tie. The first guy says, "Buying that tie won't be him happiness." The second guy says, "Sure it will ... for about 24 hours."
It strikes me that happiness is more fleeting and driven by immediate circumstances while meaning has greater resilience, not easily influenced by the immediate circumstances of any given moment. I also expect, as hinted at the end of the article, that what many of us are genuinely persuing is meaning but mistaking happiness for meaning. I wonder if there is a role for the church in all of this? ;-)
I found Schwartz's distinction between maximizers and satisficers helpful. I'm definitely on the satisficer end of the scale and I don't see the abundance of choice as that big of a problem most of the time. Only on truly costly decisions do I move more into a a maximizer mode. The risks of a bad choice in most decisions just isn't worth the worry to me.
Economic mobility has not changed in forty years according ths NEBR paper: Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility
I still hear many people today talk about the "Third World." It refers to those nations that were poor and not aligned with either the Western capitalism (First World) or the communist world (Second World.) The Third World has vanished and it is time to bury the term. The world’s nations and populations exist on a continuum and there are now multiple poles, not two, shaping the world. Furthermore, the story is not one of descent into global dystopia but one of rising prosperity. It is hard to meaningfully address contemporary problems with antiquated frameworks.
It’s time to develop a new framework for assessing the post-Cold War, post-9/11 world. ...
... The three worlds used to be capitalist, communist, and the rest. Now they are the West, the failed states, and the emerging challengers. But that's still too simple a view. A small and declining number of developing countries are charity cases. And none are competitors with us in a zero-sum game. Rather than dividing most of the planet into two threatening classes, we need to see states of the developing world as vital partners—both in strengthening the global economy and in preserving the global environment. ...
... Given that much of the world only makes headlines when it is in the midst of a humanitarian crisis and U.S. assistance is on the way, it isn’t surprising that the average American thinks things are going to hell in a handbasket: a recent survey of Americans found that two thirds believe extreme poverty worldwide has doubled over the past 20 years. The truth is that it has more than halved. This might also explain why Americans think that 28 percent of the federal budget goes to foreign aid—more than 28 times the actual share.
According to the World Bank, the developing world as a whole has seen average incomes rise from $1,000 in 1980 to $2,300 in 2011. Life expectancy at birth has increased from 60 to 69 years over that same time, and college enrollment has climbed from 6 to 23 percent of the college-age population. Progress is happening everywhere, including Africa: Six of the world’s 10 fastest-growing economies over the past decade are in Africa. There were no inter-state conflicts in the world in 2013 and, despite tragic violence in countries including Syria and Afghanistan, the number of ongoing civil wars has dropped considerably over the last three decades. Emerging markets themselves are also playing an ever-expanding role in ensuring global security. The developing world is the major source for blue-helmeted UN peacekeepers, who are ending wars and preserving stability in 16 different operations worldwide. The 20 biggest contributors of police and military personnel to the UN’s 96,887 peacekeepers are developing countries. ...
Very interesting piece. For more data, see yesterday's post, The (Mostly) Improving State of the World.
Washington Post: 40 charts that explain the world
Our friend and colleague Max Fisher over at Worldviews has posted another 40 maps that explain the world, building on his original classic of the genre. But this is Wonkblog. We're about charts. And one of the great things about charts is that they show not just how things are -- but how they're changing.
So we searched for charts that would tell not just the story of how the world is -- but where it's going. Some of these charts are optimistic, like the ones showing huge gains in life expectancy in poorer nations. Some are more worryisome -- wait till you see the one on endangered species. But together they tell a story of a world that's changing faster than at arguably any other time in human history. ...
As the author notes, we have challenges but we hardly descending into some global dystopia. I think these charts give a pretty holistic view. Here are a three examples.
It was commonly believed that primitive societies were more peaceful and that modern civilization gave rise to unprecedented violence. This chart compares death rates by war in primitive societies as calculated by anthropologists to the death rates for Europe/USA in the 20th century.
And then there is this:
The graphs point to environmental protection and adaptation as the biggest problems in the days ahead. Those challenges are not insurmountable. Energy sources like natural gas and nuclear power can be used in the interim on the way to practical renewable technologies. Genetically modified crops can help to reduce water consumption, increase yield, and improve hardiness. Innovations in fields like biotechnology, nanotechnology, and 3-D printing hold the promise of revolutionizing the world economy into a less wasteful and more affordable human existence for everyone. There is work to do but there is also much reason for hope of a better world.
Posted at 03:33 PM in Demography, Economic Development, Economics, Environment, Generations & Trends, Globalization, Health, Poverty, Religion, Science, Sociology, Technology (Biotech & Health), Technology (Digital, Telecom, & Web), Technology (Energy), Technology (Food & Water), Technology (Manufacturing & Construction)), Technology (Transportation & Distribution), Weatlh and Income Distribution | Permalink | Comments (0)
Public Discourse: Max Weber Was Wrong - Samuel Greg
... Second, the empirical evidence disproving Weber’s connection between Protestantism and the emergence of capitalism is considerable. Even Catholic critics of modern capitalism have had to concede that “the commercial spirit” preceded the Reformation by at least two hundred years. From the eleventh century onward, the words Deus enim et proficuum (“For God and Profit”) began to appear in the ledgers of Italian and Flemish merchants. This was not a medieval version of some type of prosperity gospel. Rather, it symbolized just how naturally intertwined were the realms of faith and commerce throughout the world of medieval Europe. The pursuit of profit, trade, and commercial success dominated the life of the city-states of medieval and Renaissance Northern Italy and the towns of Flanders, not to mention the Venetian republic that exerted tremendous influence on merchant activity throughout the Mediterranean long before 1517.
Since Weber’s time, much scholarly work has been done to illustrate the advanced state of market-driven economic development in the Middle Ages. Throughout the 1940s and 1950s, the Belgian scholar Raymond de Roover penned numerous articles illustrating that, during the Middle Ages, financial transactions and banking started to take on the degree of sophistication that is commonplace today. Likewise, The Commercial Revolution of the Middle Ages, by the Italian-American historian of medieval European economic history, the late Robert S. Lopez, shattered the historical claims that formed much of the background of Weber’s argument. Lopez demonstrated in great detail the way in which the Middle Ages “created the indispensable material and moral conditions for a thousand years of virtually uninterrupted growth.”
In recent decades, the historians Edwin Hunt and James Murray have illustrated just how much the medieval period was characterized by remarkable innovation in methods of business organization. They also suggest that the advent of modernity actually heralded the expansion of state economic intervention and regulation in an effort to constrain economic freedom. In a similar fashion, the sociologist Rodney Stark has gathered together disparate sources of historical and economic analysis to illustrate the origins of capitalism and major breakthroughs in the theory and practice of wealth creation in the medieval period. Central to Stark’s analysis is his highlighting of the way pre-Reformation Western Christianity saw the world as one in which humans were called upon to use their reason and innate creativity to develop its resources—including economically.
Here one could add that, before Adam Smith, some of the most elaborate thinking about the nature of contracts, free markets, interest, wages, and banking that developed after the Reformation was articulated in the writings of Spanish Catholic scholastic thinkers of the sixteenth and seventeenth centuries. Theologians such as Francisco de Vitoria OP, Martín de Azpilcueta, Juan de Mariana SJ, and Tomás de Mercado OP, anticipated many of the claims made by Smith two centuries later.
To be sure, much of this thinking occurred by way of side-effect rather than as a result of the systematic analysis undertaken by Smith. For as commercial relationships expanded throughout Europe in the centuries preceding and following the Reformation, there was a marked increase in the number of penitents asking their confessors for guidance about moral questions with a strong economic dimension. What was the just price? When was a person no longer obliged to adhere to a contract? When was charging interest legitimate? When did it become usurious? As a result, priests looked to theologians for guidance on how to respond to their penitents’ questions. Thus, as Jürg Niehans stressed in his History of Economic Theory:
The scholastics thus found it necessary to descend from theology into the everyday world of economic reality, of early capitalism, foreign trade, monopoly, banking, foreign exchange and public finance. What one knew about these things in the School of Salamanca was hardly less than Adam Smith knew two hundred years later, and more than most students know today.
Even when we consider modern capitalism’s emergence, a direct connection between this event and Protestantism is very open to question. ...
This is a really excellent piece on the history of capitalism.
I watched the 1950 version of "A Christmas Carol" Christmas Eve. There is an interesting part of the story that I suspect few even notice. In the exchange between Scrooge and the Ghost of Christmas Past, it comes out that both Scrooge's mother and sister died giving birth. Can you imagine a case in our society where both mother and daughter die in childbirth? Such a thing would so strange that we might look for some hereditary or environmental connection between the events.
Scrooge's mother likely died in the 1780s and his sister in the early 1800s, based on Scrooge's age and calculating back from 1843 (when the book was written.) While certainly tragic, you get no sense that this was especially odd. That's because in 1843 and prior it wasn't odd. Throughout world history many women died in childbirth and upwards of one in four children born alive died before their first birthday. Average life expectancy at birth was around 30 years old. (That doesn't mean that some people did not live much longer but so many died so early that the overall average from birth was quite low.) Today it is nearly 70 years globally and 80 years in advanced nations.
The interesting thing to me is how people of Scrooge's day would have seen our life expectancy today as miraculous. Yet once a society moves into the “new normal” of high life expectancy, the miracle is quickly forgotten and seen as the natural order. We are entitled to the new normal and we come to see those not living in the new normal as victims of some injustice or malady that caused their abnormal plight.
I see this over and over with a range of socio-economic problems. For instance, I’ve seen countless books that examine what “causes” poverty. Yet if you were to go back 300 years you would see that the norm was the overwhelming majority of people living just below or just above subsistence levels. By today’s standards, the difference between those below and above was marginal. Someone looking forward from 300 years ago would have seen many of the poorest communities in African or Asia today and not been particularly surprised. Their question would not have been what causes poverty. They would have wanted to know what caused the astounding rise in prosperity in other parts of the world.
As I see it, the human propensity to cocoon within “new normals,” losing all perspective on how change occurred, is one of the biggest challenges to creating a better world. It causes us to be ungrateful for the good we have inherited and to ask bad questions as we seek the welfare of others. Maybe what we need are ghosts of economic past, present, and future, to help us see more clearly.
NPR has a wonderful set of five short videos (most about 1.5 minutes) that follows the creation of a t-shirt from cotton field to the store. It is very well done and a thoughtful presentation about both the wonder and challenges of living in a global economy. Be sure to check it out at Planet Money Makes A T-Shirt The world behind a simple shirt, in five chapters.
New Geography: The Dutch Rethink the Welfare State
When the Netherlands’ newly coronated king made his first annual appearance before parliament, he turned some heads when he addressed the deficiencies of the Dutch welfare state. “Due to social developments such as globalisation and an ageing population, our labour market and public services are no longer suited to the demands of the times”, the king said in a speech written by Liberal prime minister Mark Ruttes cabinet. “The classical welfare state is slowly but surely evolving into a ‘participation society’”, Willem-Alexander continued. By this he meant that the public systems should start encouraging self-reliance over government dependency.
It is worthwhile to reflect on the challenges faced by the Dutch welfare system. In a knowledge based economy, influenced by strong global competition and dynamic economic development, public policy must encourage thrift, education and build-up of social capital. Discouragingly high taxes and encouragingly high benefits are no way of doing so. Such policies are therefore likely to become even greater obstacles to social and economic development as they are today....
... Privatisation of social security and a shift from welfare to workfare have been coupled with the introduction of elaborate markets in the provision of health care and social protection. Not only other European welfare states, but in some regards even the US, can learn much from the Dutch policies of combining a universally compulsory Social health insurance scheme with market mechanisms. Netherlands has, similarly to Denmark, moved towards a “flexicurity” system where labour market regulations have been significantly liberalized within the frame of the welfare system. Taxes in the country peaked at 46 percent of GDP in the late 1980s, but have since fallen to ca. 38-39 percent. The Netherlands has moved from being a country with a large to a medium-sized welfare system, something that still cannot yet be said about culturally and politically similar Sweden and Denmark. The Dutch seem to have been earlier than their Nordic cousins in realizing that overly generous welfare systems and high taxes led to not only sluggish economic growth, but also exclusion of large groups from the labour market. ...
... There is a good chance that the Netherlands will continue on a long-term route towards smaller government and greater prosperity. This does not mean abandoning the idea of public welfare for its citizens but focusing more on enabling people to take care of themselves. The positive experience of past changes, coupled with the realization that change is needed, can catalyze change. If change indeed happens, it will likely not occur over-night. Continuous small steps towards change are more likely. The direction of European nations such as the Netherlands might not excite a US audience, but perhaps there is a lesson to be learned about the value of pragmatic and steady reforms? ...
James Pethokoukis: What the right keeps missing about the recovery
The center-right community continues to make two big mistakes when thinking and talking about the US economy.
First, too much negativity and pessimism. Yes, this is an historical weak recovery when measured by GDP or jobs. But a pair of economic reports out today offer optimism. Unexpectedly low weekly initial jobless claims means the monthly average has fallen its lowest level since early June 2007. Monthly payrolls gains should accelerate. ...
.. Second, too much blame on Obamanomics. Again, little doubt tax hikes, poorly designed stimulus, and sweeping regulatory efforts like Obamacare have been terribly anti-growth. You also have the opportunity cost from not following pro-growth policies such as cutting corporate taxes and reforming entitlements.
But that’s not the whole story. Pew Research notes that at 42 months and counting, the current job recovery is slowest since Truman was president. But as the above chart shows, the previous two recessions also had long jobless recoveries: ...
... We can do better than easy answers and reflexive gloominess.
Atlantic Cities: Where Americans—Rich and Poor—Spent Every Dollar in 2012
Two great graphs:
Business Insider: Rising Wealth May Have Made Americans Less Generous
... Using Google's Ngram tool, Patricia Greenfield sifted through more than 1 million books published in the U.S. over the last two centuries to see which kinds of words went in and out of favor. The time period shows a shift in American society from a more rural way of life to a boom in urban populations, which tend to be wealthier and better educated.
Over time, she found words that implied individualism increased in use, while words denoting community and generosity decreased. For example, 'get' has increased in use, while the more generous 'give' took a nose dive over the years. Additionally, "words that would show an individualistic orientation became more frequent," Greenfield told NPR. "Examples of those words were 'individual,' 'self,' 'unique.'" ...
On a related topic, John Teevan has a good post, 10 Perils of Prosperity.
So Why is Sustained Prosperity a Peril? Nearly everyone on earth prefers a life free from poverty and from the need to focus on survival. Call it liberty or call it comfort, everyone prefers this life. Now nearly 2b people enjoy that level of living thanks to the growth of economic freedom. But there are problems.
Slate: The Gender Wage Gap Lie
You know that “women make 77 cents to every man’s dollar” line you’ve heard a hundred times? It’s not true. ...
... How to get a more accurate measure? First, instead of comparing annual wages, start by comparing average weekly wages. This is considered a slightly more accurate measure because it eliminates variables like time off during the year or annual bonuses (and yes, men get higher bonuses, but let’s shelve that for a moment in our quest for a pure wage gap number). By this measure, women earn 81 percent of what men earn, although it varies widely by race. African-American women, for example, earn 94 percent of what African-American men earn in a typical week. Then, when you restrict the comparison to men and women working 40 hours a week, the gap narrows to 87 percent.
But we’re still not close to measuring women “doing the same work as men.” For that, we’d have to adjust for many other factors that go into determining salary. Economists Francine Blau and Lawrence Kahn did that in a recent paper, “The Gender Pay Gap.”.”They first accounted for education and experience. That didn’t shift the gap very much, because women generally have at least as much and usually more education than men, and since the 1980s they have been gaining the experience. The fact that men are more likely to be in unions and have their salaries protected accounts for about 4 percent of the gap. The big differences are in occupation and industry. Women congregate in different professions than men do, and the largely male professions tend to be higher-paying. If you account for those differences, and then compare a woman and a man doing the same job, the pay gap narrows to 91 percent. So, you could accurately say in that Obama ad that, “women get paid 91 cents on the dollar for doing the same work as men.”
The point here is not that there is no wage inequality. But by focusing our outrage into a tidy, misleading statistic we’ve missed the actual challenges. It would in fact be much simpler if the problem were rank sexism and all you had to do was enlighten the nation’s bosses or throw the Equal Pay Act at them. But the 91 percent statistic suggests a much more complicated set of problems. Is it that women are choosing lower-paying professions or that our country values women’s professions less? And why do women work fewer hours? Is this all discrimination or, as economist Claudia Goldin likes to say, also a result of “rational choices” women make about how they want to conduct their lives. ...
... If this midcareer gap is due to discrimination, it’s much deeper than “male boss looks at female hire and decides she is worth less, and then pats her male colleague on the back and slips him a bonus.” It’s the deeper, more systemic discrimination of inadequate family-leave policies and childcare options, of women defaulting to being the caretakers. Or of women deciding that are suited to be nurses and teachers but not doctors. And in that more complicated discussion, you have to leave room at least for the option of choice—that women just don’t want to work the same way men do.
Gavin Kennedy at Adam Smith's Lost Legacy has another excellent post on misconceptions about Adam Smith: Five Errors About Adam Smith and Classical Political Economy. He quotes an article that appeared in the Grand Island Independent by Lee Elliott and then shows five errors the author makes based on widely circulated myths. I don't know the political persuasion of the author, but his case is similar to the case I hear from many progressives as they critique Smith on the way to critiquing capitalism. Here is the pertinent part of the article:
“There has been a fascinating struggle going on within the field of economics since the 1970s.
Historically, economics has been known as the “dismal” science because of its ruthless belief that people are motivated solely by their financial interests. This came from Adam Smith’s notion that if all of us act selfishly, then an “invisible hand” will guide the creation of the best society possible.
There is a flaw. Smith recognized there was a feature of human character that just didn’t fit this idea. That feature is altruism.
He said we do things for others even though we derive nothing from it except for the pleasure of caring for others. It just doesn’t seem to fit classic economic theory. It also was almost impossible to measure. As a result, economists dropped the idea that we’re altruistic.
In fact, there is a second flaw. Classic economics assumes we are consistently rational. We’re not. In fact, it has been demonstrated that, at times, we are quite irrational but we are consistent in our irrationality.”
Kennedy goes into detail but in short A) the "dismal science" label came from Thomas Carlye in 1849, with his opposition to abolition of slavery promoted by economists who saw people as equal and deserving of liberty (read more here), B) Smith wrote positively about the importance of altruism but understood it alone to be insufficient for a sustainable economy, C) Smith used the "invisible hand" metaphor twice in the Wealth of Nations, neither time to refer to markets as a magically directing us to the best possible society, and D) the idea of homo economicus, the human being as nothing more than machines calculating utility, didn't emerge until a century after Smith's work. Read Kennedy's whole article.
My point is that whatever legitimate points Elliott has to make about modern economics (and I think he has valid points) he severely undermines his credibility by butchering the facts about the history of the position he critiques. Like so many others, he takes at face value the appropriation of Adam Smith by some modern conservatives to justify their positions. Critiquing the fiction as fact places the critic in the same camp as his or her targets. Both camps demonstrate that they are not serious about a historically rooted conversation, but rather use fiction to buttress ideological views they arrived at by other than historical analysis. A reliable critic would first unmask the false appropriations of Smith then target what they believe to be erroneous about modern economic conceptions. If critics of modern economics would actually read Smith, I think they would be quite surprised at how much of a neoclassical neoconservative he was not.