For whom exactly is inequality good?

According to a clip from Richard Epstein, inequality benefits everyone. His appearance on PBS, linked by Mankiw’s blog, gives the standard free-market trickle-down argument about income inequality. According to Epstein, when 1% of the people own ⅓ of the wealth, it gives the rest of us poor 99%'ers incentive to work hard, innovate, and strive for success, in the end creating an even bigger overall “pie” to distribute. Unequal distribution makes everyone is better off, so we should stop complaining about the haves and have-nots. But what is missing in Epstein’s rosy free-market idealist picture about the merits of inequality?

Decline of Real Wages

Epstein’s argument that all incomes have risen under neoliberal capitalism is wrong. Real wage data suggests that in fact real wages have stagnated over the last several decades, despite substantial increases in productivity and wealth. While the pie may indeed be bigger, certainly not everyone is better off. Further, the segment of the population most stricken by inequality and poverty are children and the elderly, who may be even worse off than originally estimated. 

Importance of Relative Income

Behavioral economists have been good at showing that what matters is not the absolute level of income, but rather how we earn relative to others. If more folks are falling at the bottom end of the income distribution, with lower and lower relative standing, then how are we all better off? In fact, some very influential behavioral economists from Mankiw's own institution and down the road at MIT, Michael Norton and Dan Ariely, have shown that most citizens would prefer a more equal society.

Political Power

It’s no news that income inequality undermines democracy. With resources concentrated at the top, some portions of the population can buy their way into political power and create major barriers to entry into elite circles. Epstein however idealizes perfect mobility in an unequal society. Even the Freakonomics blog was able to explain this point a while back, quoting Daron Acemoglu:

"First, people’s well-being may directly depend on inequality, for example, because they view a highly unequal society as unfair or because the utility loss due to low status of the have-nots may be greater than the utility gain due to the higher status of the haves. Second and more importantly, equality of opportunity may be harder to achieve in an unequal society … Third and most importantly, inequality impacts politics. Economic power tends to beget political power even in democratic and pluralistic societies. "

give thanks to capitalism

An "In the News" excerpt in chapter 7 of Mankiw's Principles of Economics (4e) is titled "The Miracle of the Market" and begins with the following proposition:

An opinion columnist suggests that the next time you sit down for Thanksgiving dinner, you should give thanks not only for the turkey on your plate but also for the economic system in which you live.

The topic is Thanksgiving dinner and the argument is that we owe our Thanksgiving turkey to the division of labor, supply chains, and the pursuit of private gains. Of course, the article -- an opinion piece from the Boston Globe (does that count as "In the News" to you?) -- is meant to support the "argument" laid out over the previous 13 pages that "the price of turkey at the supermarket is fair", from a social efficiency standpoint, as long as free markets are the means by which scarce resources are allocated. Central planning would require vast amounts of information and time to do what a free market economy does completely on its own.

Fair point about central planning -- but why bring it up in the first place? Why does the author's argument about the coordinating miracle of the free market have to be compared to the extreme opposite of a completely centrally planned economy?

While we can never be certain of the author's intentions, let us offer a response: perhaps elements of a planned economy trickle into the author's story in ways overlooked or simply ignored by him. In other words, it appears to us as though the tactical use of attacking the "central planning" argument is to divert attention from more important and empirically relevant matters, such as the following:

Who determines the price of gasoline used by the trucks delivering the turkeys to the store? Oil cartels play an important role in determining prices at the pump. 

Who coordinated work at the factories which produce the feed and raise the turkeys? Most likely, these tasks were performed by a manager and other centralized authority figures. 

Who regulated the quality of the Turkeys or facilitated their transportation? Government laws and statutes were necessary for these things. 

Upon reflection, it seems that there does exist an essential economic planning element to your Thanksgiving dinner. Imperfectly competitive markets and the organization of economic activity which takes place in the firm are important examples of cases in which economic agents act collectively to plan and alter economic outcomes.

So this year, give thanks to capitalist social relations for the meal on your plate. While Mankiw has tried time and again to assert the universality of the "free market" model and its relationship to Thanksgiving, a simple look around at how economies actually function suggests otherwise.

mankiw's bias revealed

Greg Mankiw recently woke up extra early to do an interview with the Fox News morning show Fox and Friends and posted the interview on his blog. The interview focused on the recent walkout that took place during his EC 10: Principles of Economics class. Both the show's host and Mankiw disputed the claims that the class was biased by indicating that the class was "mainstream", not "too conservative", and resembles the principles of economics classes that are taught at most college classes nation wide.

But those claims are precisely what makes Mankiw's class and textbooks biased: namely, the refusal to step out of the mainstream and look critically at what is being taught. Those who claim that Mankiw's approach is bias aren't simply saying that what is being said is too conservative and that it needs to be more liberal. The problem with Mankiw's approach lies in the limitations of the assumptions in the theory being discussed, methodological issues, and in the failure to recognize that there are alternative approaches to neoclassical economics. To refuse to do so is a refusal to provide his students with the education that they expect and deserve.

The purpose of a liberal education is to expose students to a plurality of ideas and modes of thought, and from the interview it seems like the Fox News anchor and Greg Mankiw would agree. But, Mankiw's supposed dedication to liberal education contradicts his approach to teaching economics. By teaching an exclusively mainstream approach to economics he fails to provide his students with a wide ranging and critical account of economics failing the students the education they were promised when they entered into academia.

It is not simply that he is failing to provide his students with the liberal education that they are promised, but that by doing so he is failing the broader project that is the development of economic thought. Throughout the history of economic thought most if not all advancement in theory came from people drawing from a plurality of ideas -- not by simply staying within the mainstream framework. By limiting the ideological scope of his class he is limiting the potential advancement of his field.

Anti-Mankiw's Favorite Textbooks and Teaching Methods

Back in 2009, Mankiw fielded a question from an instructor who wanted to know whether the teaching of Principles of Economics would change in the wake of the financial crisis. We at Anti-Mankiw strongly disagree with Mankiw's reply. Mankiw's argument rests on the assumption that the building blocks of mainstream analysis are necessary and sufficient for understanding such an unusual event as the crisis. But was he right to defend mainstream economics on such grounds?

Let's go back to the basics. A common definition for "mainstream" is:

The ideas, attitudes, or activities that are regarded as normal or conventional; the dominant trend in opinion

It seems that, contrary to Mankiw's argument about the utility of the building blocks, mainstream economics is more appropriately defended as a convention or "common language". This poses a slight problem -- for understanding the "power" and prevalence of mainstream economic analysis, certainly -- but also for thinking about how to take a different approach in the classroom. As the reader might expect from this definition, teaching parts of economic thought considered outside the mainstream, ie. ideas that may be regarded as abnormal or unconventional or not the dominant opinion, can be a daunting task, particularly when attempted at the 'principles' level of economics.

Many principles courses, micro or macro, often provide perverse incentives to teach - and to learn - solely mainstream material.  Consider the teacher's perspective.  He or she would like to do what they think is best for their students by teaching broadly and discussing economic history and different schools of thought and how their assumptions may be different, etc.  Alas, textbooks to teach non-mainstream ideas at an introductory level are not very visible.  Mankiw of course has the largest market share of introductory textbooks and teachers often receive free complimentary versions for review not just from Mankiw but from a swath of other mainstream textbook authors - and department heads often encourage the use of these mainstream texts.

But it's more than encouragement. The final exam in many principles courses, partly due to their size, are departmental multiple choice exams. This means that the well-meaning pluralist teacher now has to dedicate most of his or her time teaching to the (mainstream) test or else risk students' grades suffering the consequences.  Because teachers are in large part evaluated based on their trending performance every semester relative to other teachers, the incentive is large to stick to the mainstream text throughout the semester.

But what about from the student's perspective?  Much like the teacher, their performance matters too.  Firstly, if they are in an honors program they often have to maintain a C or above, and even students who want to learn the heterodox topics a teacher may teach, does so at risk of a lower grade.  Here again, the final exam, and indeed perhaps other quizzes and homework in the case where the teacher may not cover pluralist topics for reasons stated above, are often geared toward the mainstream, and since study time is a finite resource (of which hopefully all economists can agree that there are only 24 hours in a day), the student has the choice to focus effort on mainstream study, or shift some of that precious time to studying heterodox material that may not benefit their grade.  The institution is set up in such a way so that  the student has incentive to choose the former.

Additionally, most students who take introductory econ courses are not economics majors.  Psychology, business, accounting, sociology, and political science majors take the course as well.  A more pluralist economics discourse would account for their own major's contributions to economics, which is often ignored or brushed aside in mainstream texts.  Thus, when such a student encounters their mainstream economics course, while try as they may to stay engaged, they are often found napping as the teacher goes over the concepts of utility maximization or preference ordering, etc.  This does not help anyone - student, teacher, or department.

Nevertheless, all is not lost. There are some textbooks that do exist that try to incorporate pluralist economics at an introductory or intermediate level.   One of the best set of resources is courtesy Tufts University's Global Development and Environment Institute.  They have recently (2008) published both micro and macro textbooks that speak not only to mainstream concepts but also to issues of environmental economics, serious discussion at both micro and macro level of income inequality, institutional and historical trends in the US macro-economy,  non-mainstream discussion of international trade, and alternative measures of economic well-being and growth.  Best of all, their supplemental materials and significant portions of their texts are freely available on their website.  And, the published textbooks are affordable at only $50 each.  Another great intro text, the Economics Anti-Textbook serves to pick apart the assumption of mainstream economic theory - exposing what are often taught as simplifying assumptions for what they really are - critical assumptions.   Another great macro text by Steve Cohn, Macroeconomics: A Critical Approach, serves to discuss mainstream theory but expands the discussion to how financial markets really work, financial instability, Marxist contributions to economics, and so on.

A more complete list of texts and pluralist publications in general can be found here.  While there are certainly institutional barriers to teaching a more pluralist kind of economics, and while there are certainly financial and other barriers to assigning multiple texts to students, using materials or pieces from some of these texts can at a minimum, enhance a student's understanding of economics in its many schools of thought.

Beyond textbooks, there is a plethora of non-conventional tools that a pluralist teacher could use to engage students.   Many economics teachers invite other professors within economics as guest lecturers. Some teachers may even branch out of economics and occasionally invite someone in a Business Finance field to lead a group discussion.  But we would venture to guess few mainstream teachers really embrace plurality enough to invite, for example, an I/O psychologist to discuss motivations for decision making in labor markets that may not be deemed to be 'rational'.

There are other tools a teacher who wants to expand the usual economics dialog can utilize.  How about adding some behavioral economics to the classroom by running the occasional group 'experiment'?   One of the best creators of such experiments is Prof. Denise Hazlett of Whitman College: experiments that show how the normal loan-able funds model can breakdown in times of economic and  inflation uncertainty, or how investment coordination failures can result in large recessions. 

Finally, we suggest mixing the typical lecture up with topics that go beyond the normal mainstream discussion by using a good podcast (radio is not dead!) or perhaps a YouTube video.  These mediums are particularly helpful at engaging a student - especially students from outside the economics department.

anti-mankiw links

1. If Greg Mankiw wanted to inform his readers about the "Profile of OWS", he might have gone for something that was a little less focused on the profile of one individual, and instead, posted this excellent analysis of the WeAreThe99% Tumblr by Mike Konczal. Konczal's article actually gives a breakdown of the different platforms the Occupiers take and then discusses what that means for understanding the overall shape of their politics. An excellent "profiling" if we have ever seen one.

The thing is, the article in the Nation to which Mankiw linked was not even intended to be a full profile of OWS per se. The article, entitled "The Audacity of OWS", about the different types of groups which make up OWS and how they are often going against the "grain" in their respective communities in order to speak up against inequality and its adverse effects on democratic process. In the end, the article is a celebration of their tactics and resilience in the face of all sorts of outside pressures.

What was Mankiw's intention in linking to the piece in the first place? Does he find it funny that the (now unemployed) teacher, who probably decided to get a Master's degree to increase his earnings potential, ended up focusing on puppetry? While it is of course difficult to argue where precisely Mankiw stands on any particular issue when all he does is link to a post, his past behavior gives us a pretty good idea of how bad his blog "reporting" skills are and what his attempted message is. We can only infer what he really meant, but one thing is absolutely certain: his attempt to give us an overview of who the Occupiers really are ended in abysmal failure.

2. We think that this article by Barry Eichengreen, posted by Mankiw the other day, is an excellent discussion of some of the dangers facing the European economy as Greece searches for a way out of its fiscal troubles with a new Prime Minister and as Italy averts a crash itself. But one crucial issue, often skirted by mainstream media, is the impact the crisis is having on the actual people living in these countries.

How will the European "dark days" affect working people? Louka T. Katseli, writing for TripleCrisis, observes how the huge pay cuts taken by public workers across Europe are affecting perceptions of the viability of a European "social democratic" model that is increasingly favoring the financial sector. We believe that Katseli has written an excellent essay on these issues in a way that brings to light the impact of austerity measures on the government's ability to supply people with, for example, basic health care and social security checks.

Deus ex machina in economics

Deus ex machina refers to a plot device in plays or stories, where a sudden solution emerges seemingly out of the sky to solve particularly perplexing problem in the story’s events. For the economic story and unemployment problem, the “machina” part becomes quite literal. When in doubt, blame machines and technology.

Back in the roaring 2000s, Mankiw posted this brief explanation of technology and inequality:

“1. There is little doubt that U.S. income inequality has been increasing for the past three decades. (The trend in world inequality is very different.) Most economists who study the topic attribute the trend primarily to changes in technology that reward skilled workers relative to unskilled workers. Education and other skills are more valuable now than they were in the past.”

That certainly fits in swimmingly with the standard neoclassical recipe- preferences, factor endowments, and technology- but should we really be blaming our income inequality and high unemployment on schools and machines? Exactly how does this work?

On Mankiw’s blog, he recently added some comments on his “it’s education, stupid” stance mentioned in our last post, with some words from economist Erik Brynjolfsson. Stagnation via technology is the premise of a new e-book by Brynjolfsson and Andrew McAfee entitled “Race Against the Machine”.  The authors claim that the digital age, with increasingly sophisticated computer usage and expansion in communications tools, has had a distinctly different effect on the economy than other periods of technical change. Instead of creating more jobs than it destroys, the digital form of mechanization has given us a net decrease in jobs by taking over much of the work. Maybe more importantly, the benefits of increased productivity are more likely to be unevenly distributed in favor of those “superstars” which the technology favors.

While Brynjolfsson and McAffee still pick focus on workers' skills not keeping pace with technology, the second part of their premise actually offers a much more in depth story as to exactly why technology may enhance inequality. Turns out, the authors claim that our social institutions that govern things like distribution of wealth have not kept up with these rapid changes in technology. Although the authors pick up the "blame the victim" rhetoric, I would argue against their claim that workers' skills are not keeping up with technical change, since of course, educational institutions and human capital investment are socially determined just like any other social institution. That means that ameliorating supposed skills mismatch through education doesn't work unless you radically alter the educational system itself, to something equitable and attainable. (In fact, education too may exacerbate inequality.)

Building on part of their argument then, it’s not education, technology, or inefficient workers; it’s inefficient and outdated institutions that have led to the divergence in income levels over the past several decades. 

The most introductory and famous example of sticky, inefficient institutions can be found in Paul David’s famous paper noting the presence of inefficient institutions, showing how the standard QWERTY keyboard layout caught on despite being slower than other options. So maybe institutionalized inequality, perpetuated in part by the logic and rhetoric of mainstream neoclassical economics, is a part of our inefficient and clunky distribution system that allows technology to exacerbate wealth and income inequality. 

In the story of unemployment then, machines and even education can no longer be our economic scapegoats. Instead, we should recognize it’s the social institutions that constitute our economy that should be of real concern. Let's start going to the root of the problem.

Want to join the 1%? Enroll now!

In a recent blog post, Greg Mankiw posits that education is the key to closing the income gap, allowing upward mobility for any regular 99%er to join the elite 1%. According to Mankiw, working hard in school improves the odds that an individual is able to join the 1% or at least significantly increase their earnings potential. Education then closes the income gap and smoothes out inequality.

But the question arises: if college enrollment has been steadily increasing over the years, why do we still have the highest income inequality in decades?

Let’s give a closer look at Mankiw’s claim about the great equalizer that is college. In this claim, he fails to acknowledge that access to education is often determined by the income of a potential college freshman’s family. Simply put, Mankiw fails to acknowledge that barriers to access exist.

A 2007 report by UCLA on entering freshman found that the median income of the families of was 60% higher than the national average in 2005. Further, at institutions that may appear to increase the probability of joining the upper-crust 1%, namely Ivy League institutions such as Princeton, Harvard, and Yale, evidence shows the acceptance of people with incomes in the bottom 50^th percentile is exceptionally low around 10-12%. A recent Georgetown study reported on by the New York Times that within the 2010 freshman class, drawing from “193 of the country’s most selective colleges”, only 15% of the freshman class came from the bottom 50% of the income distribution and 67% came from the top 25% of the income distribution.

With those reports in mind, it becomes quite clear that for Mankiw’s claim is unsubstantiated. The idea that higher education is a means towards great income equality is solely dependent on having no barriers to access for all levels of income and socio-economic groups. Unfortunately, that is simply not the case. Unless the American educational system is drastically restructured to provide adequate college preparation across all income levels and proportionally accept students from the bottom percentiles it is likely that the distribution of higher education and wealth with remain significantly skewed in favor of the 1% and the already wealthy.

A Response to Mankiw and His Defenders

Mankiw seems genuinely concerned that his protesting students ironically had to miss his lecture on income inequality.   It is important to give Mankiw and his EC 10 text-of-choice (presumably his own “Principles of Economics 6e”) the credit deserved: he mentions income inequality and says it may be a problem depending on one’s political or philosophical persuasion.   Unfortunately, that is about the extent of the credit one can extend.

We take two broad issues with Mankiw’s NPR interview response to his students’ walkout:

1.  Mankiw’s coverage of income inequality is inadequate for an economics course(s)
2. Mankiw misses the broader point that he and his textbooks do not promote plurality of discussion on a wide range of topics beyond income inequality and its relation to economic activity

It’s clear what Mankiw’s lecture on income inequality is all about by looking at his official lecture notes.  He spends some time comparing the poor and the rich in the United States and across countries, and then quickly moves to discussing problems with measurement of income inequality.  And here’s where the bias kicks into overdrive.  According to Mankiw, measures of income inequality are drastically biased upward due to 4 things:

1. The values of in-kind transfers are often ignored when measuring inequality.  The problem is that that is not necessarily true.  For example, the US Census, in its measures of inequality began valuing in-kind government transfer programs back in 1982. 
2. People can borrow and save, therefore ‘smoothing out’ their incomes over time.  The problem with that is that poor persons, almost by definition, have little means of borrowing on credit as they often lack collateral. Second, they have little ability to save since living closer to the poverty line means dedicating just about all of income to subsistence.
3.  If what we really care about measuring is inequality of living standards, then one should compare wealth or permanent income, not transitory income levels.  Again, that is all fine and good except for the statistic is unlikely to improve for poor persons who have limited resources.  
4. Income measures fail to account for the fact that the poor have opportunities to lift themselves up.  Unfortunately, Mankiw fails to mention any barriers to doing so that exist in our society, political power, institutional limitations, or otherwise.  

The rest of Mankiw’s discussion of the income distribution can basically be summed up in 1 sentence:

The problem of income inequality is important, but something more for politicians and philosophers to further a discussion on after comparing the cost of improving income equality, at the expense of economic efficiency.

There is no discussion as to how economics (and students of the discipline) can contribute to the discussion other than as a distant, silent observer.  That is likely why it is nearly the last chapter in this microeconomics textbook – for Mankiw the discussion is an afterthought in economics, as opposed to an integral part of it – so it’s ok if instructors that use his textbook skip the chapter entirely.  Perhaps more importantly, Mankiw’s chapter on income inequality is, to the degree it is discussed, entirely from a microeconomic perspective.  He completely ignores the macroeconomic links between the income distribution and wages, profits, and economic growth.  In his GDP chapter (the macroeconomic measure of living standards) he fails to discuss other measures of income inequality that many nations use because of GDP’s inadequacies (like the Human Development Index, or the Genuine Progress Indicator) which largely stem from the lumping profit (rich) and wages (middle class / poor) into one aggregated measure of supposed well-being. 

All this said, it is disappointing that the protesting Harvard students focus so much of their attention on income inequality and fail to really focus in on the broader problem- that Mankiw and his textbooks perpetuate an ahistorical, assumption laden, non-complex market based dialog, often times ignoring other schools of thought that may have something interesting or useful to say on a topic.

Behavioral economics often points out how unrealistic some of the assumptions of textbook economics truly are, and in fact perfectly rational economic actors are more or less sociopathic.  Some heterodox schools of economics discuss how income inequality is directly related to boom/bust cycles of capitalism and therefore are not just explained by a human capital premium.  Environmental economics also discusses the relationship between economic growth, business cycles and environmental degradation beyond simply discussing market-based tax solutions.   Finally, Mankiw largely ignores the relationship that politics and economics have – and specifically the relationship between political power and economic power of which political scientists are all too familiar with understanding.  Were he to truly recognize the issue, he might have an answer for one of the biggest concerns of the Occupy Wall Street movement: why, essentially, rich people  were given preferential financial/political treatment over poor people when it was the rich people who were in large part responsible for the recent economic calamity that directly hurt the poor.

At the end of the day according to EC 10, economics is about being able to explain only a small part of individual and national choice behavior – the unrealistic perfectly ‘rational’ part - and applying only one kind of solution – a kind of economic bandage (taxes etc.), in the rare instance choice behavior isn’t so perfect or in equilibrium.  For Mankiw, economics can be boiled down to brief, vague principles.  Students around the globe are brainwashed with this limited kind of homo-economicus thinking that would make Adam Smith roll over in his grave.   Luckily, some students are waking up from the haze.  

-anti-mankiw

This is why we are Anti-Mankiw

Students at Harvard University on Tuesday, November 1st walked out of Professor N. Gregory Mankiw's Ec 10, "Principles of Economics" course, for two main reasons.

First, to declare their solidarity with the Occupy Wall Street Movement, and indeed, occupy movements currently happening all across the world.

Second, to protest the specific role played by Mankiw's course in perpetuating inequalities of wealth and power, which have plagued American (and world) capitalism for decades, if not centuries.

As the Harvard students put it in their open letter to Professor Mankiw, they are concerned with the political bias inherent in Mankiw's text, as well as how it "affects students, the University, and our greater society."

But what does it really mean to say that Mankiw, his class, and his textbook are responsible for such things?

The students state in the letter how Mankiw rarely includes a discussion of primary sources and often slants toward the classical model of political economy, expounded most famously by Adam Smith. This bias stands to the detriment of other important schools of economic thought such as Keynesianism. But the problem with his course goes a bit deeper than that. While Mankiw might argue that his New Keynesian approach to macroeconomics combines the best of both Keynesian analyses of the short run and classical views of the long run, the fact is that both Adam Smith and John Maynard Keynes understood that the economic laws of the market are not immutable "principles" of society -- a point which, unfortunately, leaves Mankiw less in the camp of either of these great thinkers, and more in the realm of political ideologues and pundits.

That is to say, the self-interested agent who "faces tradeoffs" and "responds to economic incentives", as Mankiw's "10 principles of economics" assert, describes but a very small part of our daily lives. Whether you're with your friends, or at home with your family, values of cooperation, love, friendship define your day-to-day interactions. Even political power is an important concept, not given even a single mention in Mankiw's entire text! The idea that those who are wealthy might institute political power over the economic system is an idea that, indeed, goes back to Adam Smith himself. Choosing not to discuss such an economically-relevant and important topic demonstrates a severe lack of intellectual and moral integrity on the part of Mankiw and his textbook. In other words, the whole market-centric approach of Mankiw's course is fundamentally at odds with how the world works in reality.

So given that Mankiw’s course, textbook, blog, and ideology are at odds with the actual workings of social and economic life, and even help to perpetuate our societal and economic problems through producing this image of the individual as completely oriented toward market values and ideas, it’s probably time to expand the economic conversation towards more pluralism and away from hegemonic, ideologue set-in-stone “principles”. Indeed, this is why this blog is Anti Mankiw.