By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives
This is the second column in a series on the N. Gregory Mankiw’s myths and dogmas that he spreads in his economic textbooks. The first column exposed the two (contradictory) meta-myths that begin his preface. This column de-mythologizes Mankiw’s unprincipled “principles” of economics – the ten commandments of theoclassical economics’ priestly caste. Some of these principles, correctly hedged, could be unobjectionable, but in each case Mankiw dogmatically insists on pushing them to such extremes that they become Mankiw myths.
To understand Mankiw’s mythical 10 commandments, one must understand “Mankiw morality” – a morality that remains hidden in each of his textbooks. Few people understand how radically theoclassical economics has moved in the last thirty years. Milton Friedman famously argued that CEOs should operate exclusively in the interest of shareholders. Mankiw, however, is a strong supporter of the view that CEOs will not only defraud customers, but also shareholders and creditors by looting the firm. “[I]t would be irrational for savings and loans [CEOs] not to loot.” “Mankiw morality” decrees that if you have an incentive as CEO to loot, and fail to do so, you are not moral – you are insane. Mankiw morality was born in Mankiw’s response as discussant to George Akerlof and Paul Romer’s famous 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit.”
Mankiw’s textbooks preach the wonders of the indefensible a system he has helped design to allow elite CEOs to loot the shareholders with impunity – the antithesis of Friedman’s stated goal. Mankiw morality helps create the “criminogenic environments” that produce the epidemics of “control fraud” that drive our recurrent, intensifying financial crises. It is essential to interpret Mankiw’s ten myths in light of his unacknowledged immoral views about how CEOs will and should respond to incentives to rig the system against the firm’s consumers, employees, creditors, and shareholders. His textbooks religiously avoid any disclosure of Mankiw morality or its implications for perverting his ten commandments into an unethical and criminogenic dogma that optimizes the design of a criminogenic environment.
Mankiw’s myths
- People Face Tradeoffs.
To get one thing, you have to give up something else. Making decisions requires trading off one goal against another.
This can be true, but Mankiw pushes his principle to the point that it becomes a myth. Life is filled with positive synergies and externalities. If you study logic or white-collar criminology you will make yourself a far better economist. You may trade off hours of study, but not “goals.” If your “goal” is to become a great economist you will not be “trading off one goal against another” if you become a multidisciplinary scholar – you will strongly advance your goal. If you study diverse research methods you will be a far better economist than if you study only econometrics.
- The Cost of Something is What You Give Up to Get It.
Decision-makers have to consider both the obvious and implicit costs of their actions.
“Opportunity costs” are an important and useful economic concept, but Mankiw’s definition sneaks ideological baggage into both sentences that turns his principle into multiple myths. Mankiw implicitly assumes fraud and other forms of theft out of existence in the first sentence. “Cost” is often not measured in economics by “what you give up to get it.” If your inherit a home that lacks fire insurance and immediately burns down there is a cost to you (and society) even though you gave up nothing to inherit the home. If the CEO loots “his” firm he gave up nothing to get the millions, but if he loses those millions he will consider it to have a “cost.” Theoclassical economists have a primitive tribal taboo against even using the “f” word (fraud).
Decision-makers frequently ignore the “costs of their actions.” There is nothing in economic theory or experience that supports the claim that the “decision-makers” “have” to consider costs. It is rare that decision-makers must do – or not do – anything.
It is likely that Mankiw means that optimization requires decision-makers to “consider” all “costs of their actions,” but that too is a myth. Theoclassical optimization requires perfect, cost-free information, pure “rationality,” and no externalities. None of these conditions exist. Car buyers have no means of knowing the costs of buying a particular car. If they bought a GM car the ignition mechanism defect could cause the driver to lose the ability to control the car – turning it into an unguided missile hurtling down (or off) a highway at 70 mph. The car buyer does not know of the defect, does not know who will be driving when the defect becomes manifest, does not know who the passengers will be, and does not know who and what else could be injured or damaged as a result of the defect. The theoclassical view is that the buyer who “considers” the costs of buying his defective car to others (negative externalities) and pays more money to buy a car that minimizes those negative externalities is not acting ethically, but irrationally.
It is typically cheaper (for the producer, not society) to produce goods of inferior (but difficult to observe) quality. The inability of the consumer to “consider” even the true costs to the consumer and the consumer’s loved ones of these hidden defects means that economists began warning 46 years ago that “market forces” could become criminogenic. George Akerlof’s 1970 article on markets for “lemons” even coined the term “Gresham’s” dynamic to describe the process. A Gresham’s dynamic is a leading form of a criminogenic environment.
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.
Akerlof was made a Nobel laureate in economics in 2001 for this body of work. Economics is the only field in which someone would write a textbook ignoring a Nobel laureate whose work has proven unusually accurate on such a critical point. There is only one reason to exclude this reality from Mankiw’s myths – Akerlof’s work falsifies Mankiw’s myths, so Akerlof’s work disappears from Mankiw’s principles, as does the entire concept of fraud.
- Rational People Think at the Margin.
A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.
The mythical nature of this principle flows from the multiple errors I have described. Mankiw is being deliberately disingenuous. Theoclassical economics does not claim, for example, that a firm produces a product “only if the marginal benefit of the action exceeds the marginal cost.” Theoclassical economists claim that a firm sells a product “only if the marginal benefit of the action to the seller exceeds the marginal cost to the seller.” The seller ignores social costs and benefits.
For the sake of brevity, I will summarize that Mankiw’s third principle is a myth for five reasons known to every economist. First, it implicitly assumes out of existence positive and negative externalities, which means that supposedly rational, self-interested decision-makers he postulates, even if they had perfect, cost-free information, would not contract to maximize social welfare.
Second, as Mankiw morality implicitly admits, the actual optimization principle under theoclassical economics would be determined by the marginal benefits and costs of an action to the decision-maker – the CEO – not the firm, and certainly not society. Theoclassical economists, however, refuse to admit that explicitly, so it disappears from Mankiw’s 10 commandments.
Third, the information provided by CEOs is often not simply incomplete and costly, but deliberately deceptive. Where information is merely incomplete, consumers may pay far more for a product than they will benefit from the purchase. Where the seller provides deceptive information about quality, the buyer and members of the public may be harmed or even killed. The CEO may also be looting “his” firm as well as the customers. Mankiw has implicitly assumed perfect, cost-free information and implicitly assumed that fraud does not exist.
Fourth, conflating rationality with optimization of personal costs and benefits is wrong on multiple grounds. It defines ethical behavior as “irrational” where the consumer or CEO takes into account social costs and benefits and protects the interests of others in an altruistic manner. Everything we know from behavioral economics also makes clear that humans are not “rational” in the manner predicted by theoclassical economics. Mankiw has implicitly assumed out of existence thirty years of economic research on how people actually behave and make decisions.
Fifth, firms with monopoly power, according to theoclassical economics, maximize their profits by deliberately reducing production to a point that the social cost of producing the marginal unit is less than the marginal benefit to the consumer. Mankiw has implicitly assumed away monopolies.
- People Respond to Incentives.
Behavior changes when costs or benefits change.
I have responded to this myth in a prior article. The implications of his fourth principle in conjunction with Mankiw morality are devastating for theoclassical economics. CEOs create the incentives and understand how “behavior changes” among their agents, employees, and subordinate officers in response to those incentives. Under theoclassical principles this will unambiguously lead “rational” CEOs to set incentives to rig the system in favor of the CEO. Because fraud and abuse creates a “sure thing” that is certain to enrich the CEO, Mankiw’s fourth commandment predicts that control frauds led by CEOs will be ubiquitous. Fortunately, many CEOs are ethical and remain ethical unless they are subjected to a severe Gresham’s dynamic. As a result, Mankiw’s commandments over-predict the incidence of fraud and abuse by CEOs. Similarly, experiments demonstrate that humans frequently act in altruistic manners despite financial incentives to act unfairly.
- Trade Can Make Everyone Better Off.
Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.
See my article on faux “trade deals” that exposes this myth.
- Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.
Again, the key interaction under theoclassical theory is between CEO and consumers, employees, creditors, shareholders, and the general public. “Markets” are vague constructs and they work best when ethical and legal provisions reduce fraud to minor levels. When these ethical and legal institutions are not extremely effective against fraud, the incentives created by the market can be so perverse that they create a criminogenic environment that produces epidemic levels of fraud. Mankiw’s myth is to describe only one possible incentive and treat it as the sole possibility other than what he falsely describes as “the opposite” – a government planner. The opposite incentive to the so-called “invisible hand” is the Gresham’s dynamic. Mankiw mythically presents the government as the threat to an effective economy rather than an institution that is essential to producing and enforcing the rule of law that prevents a Gresham’s dynamic.
- Governments Can Sometimes Improve Market Outcomes.
When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution.
The myth here is that government only has a desirable role where there is a “market fail[ure].” Mankiw treats “markets” as the norm and implicitly assumes that the government normally has nothing to do with making markets succeed. Even conservative classical economists admitted that the rule of law was essential to an effective economy and required an effective government. Well-functioning governments always improve “market outcomes.” Indeed, they are typically essential to making possible well-functioning “markets.”
Mankiw also fails to explain that “markets” will be fictional and massively distort resource allocation (that is what a hyper-inflated bubble does) when there is an epidemic of control fraud. As I have explained, Mankiw’s own principles predict (indeed, over-predict) that deregulated “markets” will frequently prove so criminogenic that they will produce epidemics of control fraud.
- A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation’s productivity grows, so does its average income.
First, the CEOs of sectors such as finance that are immensely unproductive – so unproductive that they cause enormous losses rather than growth, and receive exceptional income because they loot. Income is often based not on productivity, but on the CEOs’ wealth and economic and political power that allows them to rig the economy. A nation’s standard of living also depends on its employment levels, which can be crushed by economic policies such as austerity.
The issue is not what happens to “average income,” but what happens to median income, wealth, the income and wealth of the lowest quartile or particular minorities, and to income and wealth inequality. A nation can have high average productivity, yet have poor performance for decades in these other critical measures.
Consider what has happened to the folks who tried to do everything right to boost their productivity according to the theoclassical economic “experts’” advice. This is what has happened to Latino and black households where a head of the household has at least a college degree. The source is economists at the extremely conservative St. Louis Fed.
Hispanic and black families headed by someone with a four-year college degree, on the other hand, typically fared significantly worse than Hispanic and black families without college degrees. This was true both during the recent turbulent period (2007-2013) as well as during a two-decade span ending in 2013 (the most recent data available).
White and Asian college-headed families generally fared much better than their less-educated counterparts. The typical Hispanic and black college-headed family, on the other hand, lost much more wealth than its less-educated counterpart. Median wealth declined by about 72 percent among Hispanic college-grad families versus a decline of only 41 percent among Hispanic families without a college degree. Among blacks, the declines were 60 percent versus 37 percent.
One of the reasons that college-educated Latino and black families lost so much wealth compared to their white and Asian-American counterparts is that they were more likely to get their degrees from the for-profit colleges that theoclassical economists touted – colleges that frequently provided a very expensive and very poor education, often involving defrauding the students. Another reason that college-educated Latino and black families lost so much wealth compared to their white and Asian-American counterparts is that they were far more likely to be the victims of predatory home lending – an activity for which theoclassical economists served as the primary apologists.
Mankiw also ignores critical factors that determine “a country’s standard of living.” Yes, China reports higher growth, but it is also operating in an unsustainable fashion that has destroyed much of its environment and threatens to be a major contributor to the global suicide strategy of causing severe climate change.
- Prices Rise When the Government Prints Too Much Money.
When a government creates large quantities of the nation’s money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.
No, and Mankiw knew this was a myth when he wrote it. First, “prices rise” for many reasons. Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage others to do so in order to increase prices on existing drugs by hundreds, sometimes thousands of percent. Prices rise because accounting control fraud recipes hyper-inflated the largest bubble in history in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels cause oil shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.
Inflation has not risen, indeed general price levels have often fallen (deflation) despite record creation of money by central banks and private banks. Theoclassical economists have regularly predicted hyper-inflation. As Paul Krugman emphasizes, virtually none of them even admits their serial prediction failures.
- Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.
Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.
Mankiw ends his ten myths with a series of myths. Foolish, counterproductive austerity often causes inflation to fall to harmfully low – even negative (deflation) – levels that can lead to prolonged recessions that cause severe damage to people and economies. Stimulus provides a win-win that improves economic growth and reduces human suffering without causing harmful inflation.
A nation is able to operate at extremely high levels of employment without producing harmful inflation. Mankiw is a partisan Republican. When Republican presidents in the modern era are faced with recessions they junk their theoclassical dogmas and adopt stimulus programs, though they generally do so largely through the economically inefficient and less effective means of slashing tax rates for the wealthy.
Democrats: Please Renounce Mankiw’s Myths
Unlike the Republicans, who always rise above their theoclassical principles when their president is in office and faces a recession, the “New Democrats” are the ones who seem to have drunk the theoclassical Kool-Aid and strive endlessly to create the self-inflicted wound of austerity when they are in power. New Democrats also love to bash Republican presidents for running deficits even when those deficits produced no harmful inflation and helped produce recovery. It is sensible and honest to point out that tax cuts for the wealthy are a far less effective form of stimulus and to present and support superior alternatives such as job guarantee and infrastructure programs. It would be superb if Democrats were to point out that by far the most effective, prompt means of cutting taxes to stimulate the economy in response to a recession is to cease collecting the Social Security taxes for several years. It is not fine to praise Bill Clinton for taking the harmful step of running a budget surplus or to bash Republicans because they – correctly – increased fiscal stimulus (and therefore the short-term deficit) in response to a recession.
Democrats also need to stop spreading the myth that Bill Clinton was an economic marvel. He was the luckiest president in history in terms of timing. His economic “success” was the product of two of the largest bubbles in history (the dot.com and real estate bubbles). The real estate bubble is the only thing that prevented his dot.com bubble from causing an economic collapse during his term. The real estate bubble was so enormous that it made it easy for the fraudulent CEOs to “roll” (refinance) the fraudulent loans they made, which helped cause the bubble to hyper-inflate. The saying in the trade is “a rolling loan gathers no loss.” This meant that the bubble was Bill Clinton and George Bush’s bubble, but it collapsed on George Bush’s watch so Clinton gets the credit for the high employment produced by the twin bubbles and Bush gets the blame for the massive unemployment that a massive bubble will create when it collapses (if it is not replaced by an even larger bubble).
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A person of “good” intent is going to work hard and give away the surplus. On the other side, a person of “bad” intent is going tobe lazy, accept the surplus, and seek more. When a third person enters, good intent isn’t going to exert influence, coercion, but bad intent is. That’s what passes for democracy. As the majority grows relative to the minority, the minority develops coping mechanisms, essentially discounting the majority.
Any time you have complex systems, take a layer off until you see the source and add back layers to confirm. The begin is 0 =0, with explosion on one side and implosion on the other. That’s also the easiest way to learn algebra. 2 = 1+1; 2 = x+1; 2~1 = x+1~1; x = 1. Just add, subtract, divide and multiply on each side until you see the rules and then replace one of the numbers with a variable and solve. Essentially that’s what the AI compiler does.
Geometry simply increases dimensions. That DNA bank, like the law, appears to be a tangled ball of yarn, but it’s actually quite specific dimensionally, ensuring particular reactions, which would not occur in a linear system. Calculus is just a mathematical short cut system, with dimensional trade offs most ignore.
Any explosive funnel of funnels traveling through space is going to ignite at the base, at the = sign in 0 = 0. The funnel opens until equilibrium geometry (quantum clock frequency) is attained (attenuated), implosion and explosion, wavelength and frequency speed of light in the subsystem humans generally investigate. In the case of earth, season tells the plant when to develop and light/dark when to diffuse that light energy into food energy. Energy is information, most of which humans ignore.
All expert systems are inherently lazy, beginning with a self biased conclusion and building a model to suit. Genetically modified people eating genetically modified food in boom and bust demographic cycles is an executable outcome. Public Education policies are disgusting to anyone who really wants to learn, and anyone expecting anything useful as its result is whistling past the grave.
The only space the experts and their followers are going to explore is the space between your ears. Government doesn’t represent working people, which is why it repeats itself, traveling back in time to trigger genetic degeneration with mathematical certainty. The only way government can know what you are going to do next is if you accept it as reality, which is what peer pressure is all about, each group with its own cabal of experts.
I’m starting to get you, ke. Good stuff.
Your point is what, precisely?
Your mathematics is nonsense, “geometry just adds dimensions” is just strange.
The pots are calling the kettles black; standard politics, redundancy easily replaced by automation.
You do know that Bernie isn’t going after Hillary because he has his skeletons, especially in the medical university complex, don’t you. Ever live in Vermont. You did notice that Hillary just threatened him, to the core of his argument.
Ke – Very insightful!
This… “Energy is information, most of which humans ignore.”…and this… “Public Education policies are disgusting to anyone who really wants to learn…” are the important elements although I would add that humans don’t ignore so much as don’t know/are not taught, and I would say Public education has been purposefully corroded to the point of disgusting.
Democrats: Please Renounce Mankiw’s Myths
Good one.
“Prices rise” for many reasons.
Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage others to do so in order to increase prices on existing drugs by hundreds, sometimes thousands of percent. Prices rise because accounting control fraud recipes hyper-inflated the largest bubble in history in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels cause oil shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.
————–
All of these examples treat relative price rises in the affected sector, not the general inflation which saw the U.S. CPI increase by a factor of ten (10) since 1950. Hedge funds and cartels couldn’t do that, no matter how successful they were in increasing their share of the pie.
The same logic is used by union busters to claim that “greedy labor unions” cause inflation — an equally false notion. Labor can increase its share of national income at the expense of corporate profit, but it cannot cause a general inflation.
This unprecedented secular inflation did, however, coincide with government bonds surpassing gold as the Federal Reserve’s largest holding in 1945, and with the dollar’s gold link being severed in 1971.
Bill Black evidently hews to the scholarly tradition of the eminent Argentine economist and former central banker Mercedes Marcó del Pont:
This from a country that lopped thirteen (13) zeros off its currency in the past century.
I would argue that the real estate bubble caused genuine inflation because it was a credit bubble, but I agree on your other points. Intuitively I think of inflation as a rise in prices without a corresponding rise in (average) affordability. It’s why a Big Mac today can cost multiple times what it did 30 years ago without being any less affordable for the average customer.
Mankiw’s definition isn’t precisely wrong but it’s oversimplified. He doesn’t address the role of banks in money creation, he doesn’t define money (what about credit?) he doesn’t discuss the factors that might cause government to print more or less money, and he doesn’t say how much is too much. Without more rigor than he provides, it’s only useful as a plausibility argument after the fact.
Regarding Black’s comment:
I would say this was because they were doing it during the deflation of a credit bubble on a large enough scale that money creation by the government was a drop in the bucket by comparison, and that was what caused deflation. Which again points to the importance of defining terms and operating constraints (why couldn’t the government print money on a massive scale to compensate? What are the drawbacks and limitations on that approach?)
Economists do love to make doomsday hyperinflation predictions that never seem to pan out. As far as I can tell, that’s because they think that the economy is inherently unstable and will lapse naturally into massive inflation (see: wage-price spiral) or some other disastrous state without the wise guiding hand of a central banker to prevent it. There seems to be very little evidence of this actually happening in reality, and the few genuine examples of hyperinflation (Weimar, Zimbabwe) have typically resulted from a collapse in production coupled with debts denominated in other currencies that (a) considerably exceed the country’s ability to pay and (b) require the attempt to be made anyway.
Notice that Mankiw managed to say nothing about “Economic instability or deflation, and eventually economic depression, is caused when the government prints TOO LITTLE money”, which is actually true and happens quite reliably.
Mankiw is a propagandist.
The true laws of economics:
0. If it is physically impossible for something to occur, it won’t, and finance be damned. Economics is first and foremost a branch of the physical sciences, though most economists have forgotten this.
1. Supply and demand.
2. Unintended consequences.
3. High productivity does not create high wages. High wages create high productivity. If you spend a lot of money on water-conservation technology at the base of Niagara Falls, will it increase the economic value of water there?
4. The physical utility of a commodity (including labor) is not related to its economic value. Adam Smith did get something right.
5. Nothing in this universe can grow exponentially for very long. Societies with sustained high fertility rates will always be miserably poor, and only societies that have first reduced their fertility rate can hope to become rich.
6. A (more-or-less) free market is indeed a powerful and essential optimization mechanism (“the invisible hand”) but it is nonlinear. Like all such nonlinear optimization mechanisms, it can and does get stuck in local minima and require external directed efforts to move to a more optimal solution. This is basic math.
7. Inflation occurs when prices go up. That’s it.
8. “Capitalism” guarantees neither poverty nor prosperity. The market is neutral. Even as the laws of physics are obeyed equally well by a building that stands tall as by one that collapses into a heap of rubble, the laws of the market are also obeyed in miserably poor Bangladesh as well as in prosperous Switzerland. With 100 desperate people competing for every job, wages for the many will be low and profits for the few will be high. And vice versa. Blaming “capitalism” for poverty is silly, as if I threw someone off a cliff and then blamed the law of gravity for their death. Trying to deny market forces is equally silly, like trying to legislate gravity out of existence. It simply must be worked with.
9. “Free to choose to own or employ slaves”, “Free trade includes the ability of big corporations to restrict trade to maximize their profits”, “Free to buy politicians and have them loot the public treasury in your interest” … Strict libertarianism is logically incoherent and ethically vile.
Nice.
I quibble with 6 & 8. “A more or less free market” is a well regulated market. How much “more free” or “less free” a market needs to be to best distribute its product depends entirely on its particular conditions and vagaries. The insinuation that a market should be “stuck in a local minima” before oversight can improve its performance echoes Mankiw’s 7th misconstruction, that (in Bill Black’s words) “government only has a desirable role when there is a market failure.”
I especially disagree that markets are neutral. Markets exist at the pleasure of the Capitalists who create and smother them for profit. Capitalists are forever cajoling “market opportunities” out from under every rock they can turn over. They invent, shape, split, combine, dissect, analyze, produce, reproduce, abandon, corner and strangle markets in pursuit of lucre. There is no market for Ford electric cars in California beyond the handful required by statute, despite ample demand, because individuals at Ford have determined that creating that particular market will eat into the personal profit they might extract from other markets. “Efficient” markets, that only return a gazilionth of a point on investment because of optimal competition, cease to be because the margin is too low to justify the hassle or the capital risk. Switching gears, labor markets in Bangladesh & Switzerland exist when Capitalists decide to hire workers. Hirees agree to be paid what Capitalists choose to pay, whether “freely” or under the duress of the State.
There is no market equivalent to gravity or the law of planetary motion. The model of supply and demand is a hypothetical post rationalization of a shifting negotiation – while it’s helpful to a degree, supply/demand doesn’t make “lawfull” (or useful) predictions until demand nears infinity (see health care: “how much will that be, doc?” – “how much have you got?”, or housing: “how much can you borrow from a fractional reserve player who lends without risk and won’t verify your income?”)
As the local monopolists of violence, States can engage markets as they see fit. They can supply (Volkswagon & the post office), demand (food stamps, R&D grants), regulate, open (ACA) or close them (pharmaceutical imports) to their hearts desire. Good or bad outcomes depend entirely on the wisdom of the policy.
Whoa. Exhale. To be sure, I inhaled. Too many words when I should just say:
Nice.
Its good we agree that policy should be just and compassionate.
The values and ideology represented in the Economics textbook Bill Black analyzed didn’t arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of a narrow segment of our society who have accumulated enormous personal wealth through a variety of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund “Economics Chairs” in our public and private universities; economics “think tanks”; and speeches, books, consulting engagements, and board memberships for “prominent economists”.
This matter is really about whose values will control government economic policy and law.
Excellent analysis. Thank you, Bill Black, for all you do and have done.
#11
Mankiw is a shill/useful idiot for his oligarchs patrons. #11 explains the idiocy of the previous 10.
I see much of the underlying theory of classical economics as simplifications that make the math easier. One of my favorite examples of misallocation of resources was the market for Burbank Russet potatoes in 2001. Basically, producers wanted $6.50 per hundredweight for spuds. The big buyer, Simplot offered farmers $4.50 pre-season. Many farmers decided to wait until harvest, hoping the spot market would give them a better price. I should also mention that in Idaho, farmers not wishing to plant in a given year, could sell their water to other farmers, or to the federal government which uses the water to help salmon and to produce hydropower. Thus, producing potatoes carried the opportunity cost of water leasing. But leasing water leasing to the federal government is culturally taboo in the ag. community. 2001 was a dry year and most of the ag. water was consumed growing spuds. The outcome was a banner year in production, driving the spot market price to $0.50 per hundredweight, far less than the cost of production. Many acres of potatoes were plowed under – a total loss – to everyone. My point is – there is no way to know, in advance, what the price of a commodity will be in the future unless you know, or can limit, the rate of production and control demand. Did the banks which loaned billions to the gas frackers of North Dakota know that production would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned.
I suppose I am a bit defensive of classical microeconomics because it is elegant. But I am also terribly suspicious of its answers because one never has either the information or the control to be anywhere near as certain as the calculus would suggest.
On point #9: “Prices Rise When the Government Prints Too Much Money”. Recent inflation data suggests it’s a myth. But if restated as “When government prints money, prices rise on the goods and services that the people who receive the money tend to buy”, then it’s NOT a myth.
That was the whole problem with the Federal Reserve’s damned QE efforts. They printed gobs of money, and it all landed in the pockets of the wealthy. The stuff they buy (stocks, real estate, luxury goods, premium educations, etc.) has seen prices rise MUCH faster than nominal inflation. And the people who didn’t get any of the newly printed money (i.e., most of us)… Well, these sad folks couldn’t afford to spend any more than before, so anybody who attempted to impose prices hikes on low-end consumer goods saw a loss of sales volume.
Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly on the pockets in which the money lands.
Excellent Point!
But it’s hard to produce more of those, so with an increase in money chasing them their prices will rise. If the government handed money to poor people, they would buy food, clothes, cars, televisions, etc. In other words, things that society can produce more of. That’s my read, anyway.
Partially. Prices for good where quantities are truly fixed (like acres of land in San Francisco) can rise sharply when extra money pours in.
But even when there is opportunity to increase production, manufacturers must purchase equipment (like farm equipment for more food) or hire more workers (thereby tightening the labor market and pushing wages up). These result in price hikes. More modest price hikes than San Francisco real estate, but still real hikes. It’s the classic supply vs. demand curve from classic microeconomics.
That said, “QE to the people” is certainly less objectionable than the “QE to the bankers and the 1%” that we’ve seen over the past five years. Prices would go up, but people would get to buy more things they want or need, and hiring would likely go up as well. [And at a minimum, there needs to be at least *some* growth in the money supply to keep up with population growth. Otherwise we see deflation and the ability to become wealthier by hoarding cash.]
This was Mankiw’s “response” to OWS back in 2011:
“Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.
“According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.”
This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters like Mankiw. Just like that guy in Davos who simply couldn’t understand why there’s so much social unrest in the world today. They live in a completely different world.
And since then, nearly every penny of income gains has gone to the 1%.
The big difference being that $70k to the 99th percentile means the difference between a new Beemer this year or next while $500 for the median family means choosing which child goes hungry for the second half of December.
And of course, Anonymous’s excellent point. You are cherry picking old data based on a stock market and real estate bubble crash. Median income families don’t “own” real estate and certainly don’t own stocks.
Mankiw is either psychotic or was gleefully obfuscating when he presenting that out-dated analysis.
I say Kill the Rich and feed their bodies to the poor. It’s not a solution at all (and I am rich myself) but it would be deeply, deeply satisfying!
My first exposure to Mankiw’s principles was actually an early version of the talk by Yoram Bauman in this video. It hits several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how Mankiw attempts to cloak his biases in supposedly neutral terms.
As for number 6, I couldn’t disagree with you more. Organisational power is dependent on it being enforced BY THE GOVERNMENT. Without that coercion, individuals would find other solutions for the want provided for by that particular organisation. I would suggest that you look at the history of Pennsylvania circa 1681-1690 or Moresnet (in what is now Aachen) circa 1816 until the end of WWI to understand what is possible when the free market really operates.
I am actually a returning undergrad student and starting an econ course next week. I just looked at the text book… and its Mankiw. Should be a fun semester.
Don’t argue with the PR. You need to be strategic. Regurgitate the BS but be sure to read enough corrective material that the toxins don’t infect your brain.
I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests is zero to the recipient. (and thus a 100% estate tax doesn’t incur large costs on the recipient)
My paper lists four principles claimed to be at the core of modern economics by Mankiw and then shows how all four principles are false: Amir-ud-Din, Rafi and Zaman, Asad, Failures of the ‘Invisible Hand’ (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: http://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940