Month: March 2011

Again, I am wondering whether R Lucas’ model can accommodate a circumstance where the cost of acquiring a skill or knowledge—let us say in history or in literature—far outweighs the enhancement this skill or knowledge will bring to future earnings?

I am not only concerned about the kind of society is R Lucas imagining; it is the society that in fact exists. Rather, I am concerned about whether it is only in such a society as this that the models he is deploying hold validity and, therefore, whether the assumptions he is making hold good only because in this society social actors are compelled to act economically.

 

Are we to conclude from this first assumption that this household is a cost-minimizing economic unit?

I am currently having my kitchen floor re-tiled. Paul Davis, my contractor, pointed out that, while the tile I chose was “greener” than the others, it would cost more to lay because it required specially-certified laborers. I pointed out that the price would come down, eventually, when more households elected to lay the “greener” tile than the more common, and more carbon-inefficient, tiles.

First, was I correct? And, second, can R Lucas’ model accommodate households such as mine that make a broad range of decisions based on value sets that are not economic?

Toward the end of class a discussion began to take shape over whether government institutions should be held to a metric of economic efficiency to measure their success. I was suggesting that the success of a program or agency should be measured by how effectively in fulfills its legislative mandate, e.g., how effectively the environmental protection agency protects the environment, how effectively the department of education educates K-12 public school children, etc.

Mr. Kil’s suggestion—that public and private are always inevitably locked in a struggle for scarce resources—needs to be taken seriously. Should not economic efficiency provide at least part of the rationale for the success of public institutions?

My answer is that economic efficiency should provide at least part of the rationale, if (weak), and only if (strong), economic efficiency is among the criteria of measuring the success of a legislative mandate. Thus, for example, it makes perfect sense for economic efficiency to be included in the criteria measuring the success of recovering penalties from corporations that conceal capital gains from the government. It also may make sense to make economic efficiency a criteria for bidding for public projects (quality and timeliness of project completion relative to cost).

However, if a legislative mandate is passed for, let’s say, ensuring that public schools are adequately funded—including a set of reasonable achievement-based benchmarks backed by sound research—then does it make sense to fold economic efficiency into these achievement-based criteria? No one doubts that we can “educate” children for less. Questions arise when the verb “to educate” is held to represent a clearly-defined set of skills and knowledge whose conditions bear a price-tag above the “market rate” for education delivery systems.

Over two millennia ago, Aristotle already identified the slippery slope down which we begin to slide when (his examples) courage, or medical capability, or winning a war are subjected to an economic metric. Everything does have a price. But some things are still “priceless,” notwithstanding Gary Becker’s objections to the contrary.

One of the leading insights I hope that students take home from their reading of Capitalism and Freedom is that M Friedman and A Bloom for all of their apparent differences come to much the same position respecting the risks that democratic institutions pose to the free market.

A Bloom comes to this position by way of his classical studies. Had political leaders (the Guardians) of Germany been more circumspect, they would have recognized that true wisdom cannot arise from history, but arises only from reason itself, and therefore would never have allowed the demos to overrun the polis. Not only do the events in mid-twentieth century Germany provide a modern illustration, for A Bloom, of a lesson Plato learned from the death of his mentor, Socrates, at the hands of Athens’ citizens, but these events also prefigure the rise in the 1960s of a popular movement that in similar manner would subject the mechanisms of the state to a politics built upon identity and passion (as opposed to universality and reason).

M Friedman comes to much the same point. When self-interested political leaders (not unlike Pericles) attempt to preserve their political power by giving in to political pressure exercised by marketplace “losers,” they undermine the very mechanisms of freedom itself. The surest insurance for freedom, therefore, is protection of the free marketplace from outside interference, whether that interference comes from business interests (in the form of monopoly) or public interests (in the form of government taxation and regulation).

In both instances, the demos, as embodied in political representatives, is cast as a threat to freedom.

Perhaps the question we need to raise is whether, on the one hand, M Friedman would object to A Bloom’s solution to this problem (de facto rule by self-selecting Guardians whose secret rule protects the possibility of successor Guardians to be identified, nurtured, and prepared for rule); and whether, on the other hand, A Bloom would object to M Friedman’s solution to this problem (limited and dispersed government empowered only to ensure that monopoly power is kept to a minimum and that no party to an economic transaction is forced or tricked into the transaction against their wishes, but N.B., not necessarily against their best interests).

My best guess is that M Friedman and A Bloom would find no fundamental disagreement with one another on these two interrelated solutions, clearing the way for what G Steinmetz has called “authoritarian post-Fordism.”

The result was that even when the Social Democrats returned to power in 1994, the neoliberal programme of ‘deficit reduction, inflation control and balanced budgets rather than full employment and an equitable distribution of income became cornerstones of macroeconomic policy’.

Should/could the Social Democrats have pursued this neo-Keynesian policy-line in light of the neoliberal turn in the US, the UK, China, and in most of the developing world? The question is not only one of principle, but one of practicality. “Full employment and equitable distribution of income” worked so long as the leading international financial institutions were on board with the global mission of democracy, social stability, and economic growth. But now that this was no longer the global mission, is it at all possible for one country to pursue the high road, while the majority (and the most powerful) are locked in a headlong race to the bottom?

Could Swedish industry have maintained high wages, benefits, and taxes, but remained competitive on the world market? Be careful how you answer this question. Surely they could not if investors in Swedish industry were simply looking for a place to park their capital and receive the highest returns on their investment. They would best do this elsewhere. But let us assume—as the Social Democrats had argued a decade earlier—that Sweden continues down the path to socialization of production. In this case, national investment in public industry could go hand-in-hand with competitive prices on the global market.

So, could or should the Social Democrats have succeeded in this strategy?

 

Degrees and Dollars – NYTimes.com

For those of you keeping score at home, Paul Krugman ran a piece on Sunday that lends credence to Gary Becker’s much earlier study showing that the more education a person receives, the lower that person’s salary will be relative to the cost of their education. Interestingly enough, this research also may support Thorstein Veblen’s theory that those who pursue prestige degrees at prestigious institutions not in order to acquire wealth or knowledge, but rather because they come from wealth and knowledge already and because they need to maintain and enhance that power and knowledge. This would suggest that newcomers enter these institutions in the hope of obtaining the cultural capital that will convey power and knowledge to them and their heirs. Education does not so much create wealth as much as it signifies wealth already created.

Figures on holdings of money and of government securities during World War II suggest that the controls may have had such effects when they were in force; but, if so, the effects were not lasting and had completely disappeared by mid-1948 when prices reached their peak. From the outbreak of the war to the subsequent price peak, cash balances as a fraction of national income fell by about the same amount in World War II as in World War I, and cash balances plus government security holdings rose by a smaller amount (lines 18 and 19). So direct controls can be rejected as a factor affecting the ultimate magnitude of the price rise.

Does the fact that prices rise precipitously when wage and price control are lifted prove that the wage and price contols were inconsequential or that their removal played no role in the ultimate rise in prices?

To begin with, we might wonder at the earnestness of M Friedman’s opening lines which in 1952 must have rung so true but which barely a decade later world begin to lose resonance. Why would wartime production, consumption, and investment have to  be so different from their peacetime counterparts; but also, why might these differences already have begun to recede from view?

One of the leading contributing factors is undoubtedly the size of military (i.e., defense) outlays both as a percentage of GDP and relative to total public expenditures. In 1952 these must already had seemed exceptionally out of balance whether when compared to 1918 to 1940 or when compared to pre-1914 values.

Whether measured in inflation-adjusted dollars or as a percentage of GDP, the volatility of the 1916-1918 period or the 1940-1947 period most, when viewed from their tails have seemed incalculable. Which is why the 1950-Present period looks, relatively speaking, quite calm and, well, easy to calculate and surely not very volatile.