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Mankiw’s Ten Principles of Economics Part 11: Conclusions

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The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.
Part 5 is here.
Part 6 is here.
Part 7 is here.
Part 8 is here.
Part 9 is here.
Part 10 is here.

This series is an outgrowth of a series of short essays [links here] on Thomas Kuhn’s The Structure of Scientific Change. Economists desperately want people to think they are scientists, so much so that they will put on lab coats as in this delightful story.

Donning customized white lab coats, University of Delaware officials cut the ribbon on the new Center for Experimental and Applied Economics at UD’s College of Agriculture and Natural Resources last week.
…
“Our experiments pay people cash to analyze their decisions,” said Kent Messer, a professor … .

Chapter 2 of Mankiw’s introductory textbook has a section titled “The Economist as Scientist”. He claims that just like physical scientists, economists “… devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.” P. 22. Based on this section, I thought he was saying that the 10 principles I’ve discussed in this series were in the nature of scientific principles. I suggested that with the addition of methodological ideas and some basic assumptions about the goals of a society, they could be treated as a paradigm in the sense Kuhn describes.

The goals of this series were: 1. to examine that possibility; 2. to see if these principles served as a structure for neoliberal economic theory, and 3. to see if there were other ways of looking at these principles that would be enlightening.

The first goal seemed perfectly reasonable. According to Kuhn, you don’t write a physical science textbook unless the community of scientists who study that area agree on a paradigm of the discipline. But my brief looks at these principles makes me think that they are either vacuously true, reductive to the point of absurdity, or hotly contested by other economists. I think I have shown that these principles do not operate as a statement of agreed-upon ideas about the way the economy works. They barely describe individual activity in any useful way.

Consider Principle 4, People Respond to Incentives. Of course they do sometimes, and sometimes not. And sometimes they respond in wildly disparate but perfectly reasonable ways. You see a car advertisement offering a price break for buying right now. Does Principle 4 help you understand how I might respond? Here’s a harder example. Interest rates go up. That creates an incentive to do what? Buy a house before rates go up further? Wait to see if higher interest rates cool off the housing market so houses are cheaper, so maybe even with higher interest rates your mortgage payment will be lower? Consume less and save more money? Wait for the stock market to go down and buy stocks? What conclusions can be drawn from this principle? How is it useful? Any time you might want to apply it, you have to look at the specifics of the situation, including the people who are supposedly going to respond to the incentives. Also, lacking data, there is a strong tendency to assume other people think like you do.

The function of the paradigm for Kuhn is to provide a platform for further research in what he calls normal science. There is an economics example in Part 10, the effort to figure out the relation between inflation and employment. People like Laurence Ball and Sandeep Mazumder of the International Fund, whose work I quote, can make a living working on ways to find an historical relationship, regardless of whether it says anything about the future. But surely if the relationship cannot actually be specified usefully after years of effort, it isn’t a real principle, and it doesn’t form the basis for a sensible research program. Morgenerally, Mankiw admits that in this blog post that there is much about macroeconomics that people don’t know.

Kuhn says that there is a difference between physics and chemistry textbooks and social sciences textbooks.

In history, philosophy, and the social sciences … the elementary college course employs parallel readings in original sources, some of them the “classics” of the field, others the contemporary research reports that practitioners write for each other. As a result, the student in any one of these disciplines is constantly made aware of the immense variety of problems that the members of his future group have, in the course of time, attempted to solve. Even more important, he has constantly before him a number of competing and incommensurable solutions to these problems, solutions that he must ultimately evaluate for himself. P 164

That does not describe Mankiw’s textbook which reads just like the physics and chemistry textbooks Kuhn describes. There are summary remarks about historical figures in the field, and the discipline is presented as a cumulative result of a steady progress of understanding. There is no question about the truth content of a single statement in Mankiw’s text, no hint that respectable economists reject his conclusions. Any student who only takes intro to economics using Mankiw’s textbook will never learn about the massive differences among schools of economics, will never learn that there are alternatives to the monetarist/neoliberal views implicit in the book, and will never have a way to examine economic policy problems from any perspective other than Mankiw’s.

That is what makes this textbook approach so dangerous. Mankiw presents a finished survey of the field, with the imprimatur of authority, when there is no consensus. It’s a fair reading of this book to call Introduction to Neoliberal Economics. It’s not fair to call it a balanced presentation of a discipline shot through with contested assertions.

I think I’ve shown that the discipline of economics has not reached the stage at which it is possible to create universal principles. That is a waste of time, and I will not spend any more time thinking about it. But it isn’t just that there aren’t any universal principles. As Kuhn would point out, with so many schools of economics there is no platform from which to evaluate any principle. The various schools conflict with each other on every possible level, and there is no way to test any theory that will satisfy the proponents of the exact opposite theory.

The worst part is that the rich have a death grip on economic policy. They choose to support policies that benefit them at the expense of the rest of us, and they hide behind a veneer of economics professionals who say the things that they want to hear. Those people teach economics using textbooks like Mankiw’s and that of Samuelson and Nordhaus. They control policy, because they have taught the leaders of today.

This and the preceding series have been really depressing to me. There is a tiny ray of hope. Bernie Sanders is the ranking minority member of the Senate Budget Committee. He appointed Stephanie Kelton as Chief Economist. She is the brilliant economist who chaired the Economics Department at the University of Missouri-Kansas City, and she is a noted scholar in the field of modern money theory. That is a completely different way forward, and one that works for progressives and frightens conservatives. That’s got to be a good thing.

Mankiw’s Principles of Economics Part 9: Prices Rise When the Government Prints Too Much Money

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The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.
Part 5 is here.
Part 6 is here.
Part 7 is here.
Part 8 is here.

Mankiw’s ninth principle of economics is: Prices Rise When the Government Prints Too Much Money. He describes hyperinflation in the Weimar Republic in Germany in the early 1920s. The US hasn’t experienced hyperinflation, but it has had problems with inflation, as in the 1970s. He says that inflation imposes costs on societies, so a goal of policymakers is to keep it under control. He tells us the cause of inflation:

In almost all cases of large or persistent inflation, the culprit is growth in the quantity of money. When a government creates large quantities of the nation’s money, the value of the money falls. … The high inflation of the 1970s was associated with rapid growth in the quantity of money, and the low inflation of more recent experience was associated with slow growth in the quantity of money.

As stated, this principle doesn’t sound quite right. In the US, at least, the government doesn’t print money, as we found out in the uproar over the Trillion Dollar Coin. That idea brought out the flying monkeys, shrieking that it would be wildly illegal for the Treasury to mint money other than small coins. According to Mankiw, in the US substantially all money is created by banks, as he explains in Chapters 16 and 17. He gives the standard description of fractional reserve banking. He explains that the Federal Reserve Board can add to bank reserves, thus creating the possibility of new loans that will create new money, or reduce reserves, reducing the ability of banks to create new money. These tools enable the Fed to control the money supply. He acknowledges that there are serious difficulties facing the Fed in exercising that control, but he claims it can be done as long as the Fed is “vigilant”. Chapter 16, page 339. With this explanation, it is not clear why Mankiw claims that government is responsible for inflation by printing too much money.

One of the difficulties Mankiw describes is the problem of measuring the money supply. In the US, there are two broad measures of the money supply, M1 and M2. The Fed quit publishing a third figure, M3, in 2006, but it is estimated by the OECD. Here’s a handy chart from Wikipedia showing the various measurements of money supply. For those interested, here’s an Austrian definition of money supply. And here’s an argument for including repurchase agreements in the calculation of the money supply. I’m not quite sure how Mankiw would measure the money supply for his principle, especially because other economists don’t agree.

I’m also not sure what to make of Mankiw’s claim that the inflation of the 1970s was associated with a “rapid increase in the quantity of money.” Here’s a chart showing the growth of M2 for the period 1965 through 1985. It looks like it is rising, a bit faster after each recession (grey bars). It looks to me like the next chart, gross domestic product over the same period seasonally adjusted. Perhaps there is some other factor, or maybe I’m just reading this wrong.

M2 65-85

GDP 65-85
Here’s a chart of M2 from 2000 to the present. There is a noticeable increase in the rate of growth of the money supply in the immediate wake of the Great Crash, leveling off in March 2009. Starting about August 2010, the increase is again greater than in the pre-Crash years. These rapid increases in the money supply match up with the Fed’s Quantitative Easing programs. It has not, as many economists (not Mankiw) predicted, led to rapid inflation.

M2 2000-2015
That points us to the central question raised by the principle: how much money is too much? If Principle 9 were a scientific principle, we could use it to work out an equation for the correct amount of money, either empirically or theoretically. Mankiw doesn’t offer either. Instead, he has a section explaining the debate between those who think the Fed should have discretion and those who think the Fed should follow a strict rule, like increasing the money supply by 3% per annum. P. 520. It isn’t much of a principle if it doesn’t lead anywhere, and doesn’t predict anything.

Mankiw’s phrasing, blaming the government for inflation because of its intervention with the operation of markets, fits nicely with Mirowski’s 10th Commandment: Thou Shalt Not Blame Corporations and Monopolies. It supports Mirowski’s Third Commandment, calling for full reliance on the marvelous market and making sure governments don’t interfere. We get a good look at this in a recent paper by Thomas Palley who has been writing about neoliberalism for some time, titled The US Economy: Explaining Stagnation and Why It Will Persist. Palley says that there are three explanations for the Great Crash.

1. The hardcore neoliberal explanation: it was all the fault of the government. Interest rates were forced too low for too long in the wake of the 2000 recession, interfering with the market for money. For purely political reasons, the government intervened in the housing market to encourage increased homeownership, leading to misallocation of scarce financial and other resources. This is the position of Peter Wallison of the AEI, whose dissent from the Final Report of the Financial Crisis Inquiry Commission explains this view. It is not recommended reading.

2. The softcore neoliberal explanation: it was the fault of government regulators. The regulators allowed excessive risk-taking by lenders, and perverse incentive pay structures in the financial sector. They allowed deregulation to proceed too far. That enabled bad allocation of the flood of foreign savings into an overblown housing sector. When it popped, the resulting financial disorder deepened a structural business cycle recession into a near depression.

3. The Keynesian explanation: neoliberalism did us in. The explanation is that neoliberal policies destroyed the institutions and rules that kept corporate greed in check and made sure that the benefits of a growing economy were shared between capital and labor. In the end, consumer demand was crushed by inadequate wages. It slowed to the point that it could not drive economic growth as it had during the period 1950-75. As incomes dropped, debt rose, so that when the Great Recession hit, there was no demand left to drive a recovery. The cycle of jobless recoveries has come to the point that stagnation is the plausible future for the US economy.

Mankiw argues for neoliberal explanations and solutions and certainly not the Keynesian explanation or its solutions. For example, in October 2008, he wrote that the Great Depression was largely cured by monetary policy, and pointed to studies saying that New Deal legislation like the expansion of labor rights was counter-productive because it allowed labor power to interfere with market forces.

I don’t doubt that the quantity of money might have something to do with inflation in some cases. I’m not convinced that it explains either the inflation of the 1970s, the lack of inflation in recent times, or the current inflation in Russia.

Mankiw’s Principles of Economics Part 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

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The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.
Part 5 is here.
Part 6 is here.
Part 7 is here.

Mankiw’s eighth principle of economics is: a country’s standard of living depends on its ability to produce goods and services. He points out that there are vast differences between the average incomes of different countries. In the US, average income has increased about 2% per year adjusted for increases in the cost of living, he says, and doubles about every 35 years. The explanation for this change is productivity, defined as “the amount of goods and services produced from each unit of labor time.” The growth rate of a nation’s productivity determines the growth rate of its average income, he asserts. He dismisses other explanations, such as the prevalence of labor unions and minimum wage laws. He claims that US productivity dropped in the 1970s which accounts for the slow growth of average wages over that period. He concludes with this claim:

To boost living standards, policymakers need to raise productivity by ensuring that workers are well-educated, have the tools needed to produce goods and services, and have access to the best available technology.

This principle supports Philip Mirowski’s Sixth Commandment of Neoliberalism: Thou Shalt Become the Manager of Thyself. “Human beings [are reduced] to an arbitrary bundle of “investments,” skill sets, temporary alliances (family, sex, race), and fungible body parts.” The goal of the entrepreneur of you is to find some way to make yourself valuable enough to fill a slot in some corporate entity that will pay off on your investments. It also supports the Ninth Commandment, Thou Shalt Know that Inequality is Natural, because it tells the entrepreneur of you that if you fail, it’s your fault for being insufficiently productive. The problem is always the workers; and never the owners of capital for they can do no wrong. That comes from the Tenth Commandment, Thou Shalt Not Blame Corporations and Monopolies, especially for investing their capital in foreign countries so jobs are created there instead of in the US. After all, the free flow of capital is critical in Capitalism, as we learn in Mirowski’s discussion of Commandment 8: Thou Shalt Keep Thy Cronyism Cosmopolitan.

Mankiw’s explanation is intellectually dishonest. He only talks about average incomes, not median incomes, and not the incomes of the working people of the US. That enables him to paint a false picture of the economy, and of the role of productivity in increasing standards of living. The leading work on this issue was done by Larry Mishel at the Economic Policy Institute. His April 2012 paper, The Wedges Between Productivity And Median Compensation Growth is the seminal work on this issue. Here’s an updated chart showing the disparity between wages and productivity. For a discussion of the productivity measurement, see this 2014 Bureau of Labor Statistics paper. It’s important to note that Mishel is using the median wage growth for production/non-supervisory workers, not total labor compensation. With this statistic, we look at the actual experience of approximately 80% of workers.
Wage-Productivity gap 1

According to Mishel, the gap in the chart from 2000 to 2011 is the result of three factors (see Table 1):

1. Income inequality increased, with the great gains going to the top few percentiles and the rest stagnant or falling, accounting for 39% of the gap.
2. Income shifted from labor to capital, accounting for 45% of the gap.
3. Output prices diverged from consumer prices, accounting for 16% of the gap.

Dave Dayen discusses Mishel’s paper here, focusing on efforts of conservatives to discredit Mishel’s work. The only consideration that seems even questionable is 3, and Dayen’s discussion seems fair. He concludes with this:

If you believe the Lawrence/Yglesias argument, policies that raise wages are secondary to policies that raise productivity more generally. If you believe the Mishel argument, reconnecting wages to productivity becomes central. Rather than stressing the need to acquire more education and skills, you would support increasing the minimum wage and allowing for more union organizing to put leverage in the hands of labor over capital. You would support proper use of overtime laws to reduce wage theft, and paid family and medical leave to keep wages strong during times of family stress.

But if productivity gains just leak out to the wealthy through financial engineering, all the growth in the world won’t benefit the typical worker.

Mankiw doesn’t acknowledge the problems with his principle, problems which have been evident for a long time as the chart shows. The source of this principle is the neoclassical argument of William Stanley Jevons and John Bates Clark which I discuss in detail here and here. Mankiw is preaching from the Natural Law Bible without mentioning it. This is a perfect example of Keynes’ dismissive statement on these writers: “We have not read these authors; we should consider their arguments preposterous if they were to fall into our hands.“ Certainly this principle is preposterous both factually and theoretically.

Mankiw’s Principles of Economics Part 7: Governments Can Sometimes Improve Market Outcomes

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The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.
Part 5 is here.
Part 6 is here.

Mankiw’s Seventh Principle of Economics is: Governments Can Sometimes Improve Market Outcomes. Mankiw says economics will refine the view of the student on the role of government. In Mankiw’s book, government has several acceptable roles:

1. Enforcement of property rights. It is imperative that scarce resources are owned by individuals and firms. Government enforces the rules and protects the institutions that support these property rights. If the rights of creators of products are not protected, people won’t make things. “The invisible hand counts on our ability to enforce our rights.”

2. Government intervention is allowed to achieve greater efficiency or greater equality.

The first point fits squarely with Mirowski’s commandments of neoliberalism. The Fourth Commandment is: Thou Shalt Retask the State to Thy Needs. The function of the strong state is to make sure that the neoliberal program can come into existence; it must, as we learn from the First Commandment, be constructed, it will not happen without force and socially acceptable forms of violence. This is accomplished by using the state to marketize everything, and by ensuring that scarce resources are put into the hands of the wealthy and secured to them. The rest of us become forced customers of private entities, health insurance companies, policing, and education. Can water be far behind? Care to buy your water from Comcast?

As an aside, privatized education really bothers me. We’ve learned that the Educational Testing Service has rewritten the guidelines for AP History to cut back on what wingnuts call negativity and the rest of us call reality, and to focus on US exceptionalism. The ETS is a private corporation. Its Chairman is Robert Murley, who is also the CEO of Apollo Education Group, Inc., which operates Phoenix University. His only interest is making money. The idea that he is a scholar is preposterous. But he sets the standards for many of our smart kids, the lucky ones in schools that have AP classes.

The second allowable activity of government is to achieve greater efficiency. This entails dealing with market failures or with externalities. Neither of these is an allowable function of government in a truly neoliberal society. Markets cannot fail in neoliberalism, as Mirowski explains in Commandment 3, Thou Shalt Worship “Spontaneous Order”. More important, market power is not a problem for neoliberals, as we learn in Commandment 10, Thou Shalt Not Blame Monopolies and Corporations. The idea that a government might intervene to reduce inequality is anathema to neoliberals. Mirowski explains this in his Ninth Commandment: Thou Shalt Know That Inequality is Natural.

For Mankiw, at least theoretically, government is allowed to legislate on externalities and market power. Sadly, all externalities can be litigated indefinitely. Between the courts and flaccid enforcement, antitrust law has been ignored for years. As to inequality, Mankiw tells us that markets reward those who produce things other people want to buy, which is closely related to his Principle Number 8. Markets, he admits, won’t make sure everyone has food, clothing, health care, shelter, or anything else. “This inequality may, depending on one’s political philosophy, call for government intervention.” That might mean welfare, progressive income taxation or other programs. Then we get a full paragraph explaining the problems of using government for these purposes, including this gem: “Sometimes policies are designed simply to reward the politically powerful.”

In my discussion of Principle 6 (markets are usually a good way to organize economic activity) I pointed out that Mankiw ignores the enormous amount of buying done by governments at every level, which in Mankiw’s language probably confuses the Invisible Hand. Similarly, in his discussion of Principle 7, Mankiw ignores the role of government in establishing the rules related to markets, and in enforcing a minimal level of anti-fraud rules. This role of government obviously improves market outcomes, unless the rules are “designed to reward the politically powerful.” I assume he doesn’t mention this crucial role of government in the economy because it would show that markets are a construction, not a given and that would be one too many deviations from neoliberal dogma.

That markets are constructed is most obvious in the area of “intellectual property”, a term that probably came into wide use in the late 1940s. Essentially, the people behind this term want to marketize intellectual activity, making it an article of commerce rather than a commons.

Mankiw assigns to government the obligation to “maintain the institutions that are key to a market economy.” I suspect this is more than the courts and US Marshals, but Mankiw leaves us hanging. Perhaps he means private groups like ETS, or the World Intellectual Property Organization. Or perhaps he means groups like the Uniform Law Commission. Who knows? Here’s a story about the Uniform Law Commission.

Several years ago, the group decided to rewrite the section of the Uniform Commercial Code governing security interests, which is the technical term for liens on personal property. The purported problem was that compliance with the requirements of Article 9 was so complex that bank paperwork occasionally didn’t comply. In Chapter 7 cases, the Bankruptcy Trustee is allowed to set aside a defective security interest, and sell the property for the benefit of unsecured creditors. Trustees are paid a small percentage of the funds raised, which encourages them to inspect the paperwork carefully. The idea was to amend the rules so that close enough was good enough. One of the participants in the revision process told a CLE session I attended that in drafting sessions, the members would joke that these provisions would really screw the Trustee. That was silly. Trustees have plenty of work, and only got a tiny payment for setting aside invalid security interests. The actual people getting screwed were unsecured creditors. Of course, none of the participants represented unsecured creditors, so the changes were made, and with the imprimatur of a supposedly neutral group, they were adopted in all of the states. I know for a fact that this resulted in more wins for the banks at the expense of common creditors. A decent government would have insisted on participation by all relevant groups in the drafting of these changes, which violently upset the original balance between secured and unsecured creditors that once was the hallmark of the UCC.

That’s the kind of institution Mankiw wants the government to protect. Oh, and ALEC.

Mankiw’s Principles of Economics Part 5: Trade Can Make Everyone Better Off

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The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.

Mankiw’s fifth principle is: Trade Can Make Everyone Better Off. He says that that my family competes with other families for jobs, and when we shop, we compete with others to find the best prices. But if we cut ourselves off from the market, we would have to grow our own food, make our own clothes, and build our own houses. “Trade allows each person to specialize at what he or she does best, whether it’s farming, sewing, or home building.” In the same way, nations can specialize in what they do best. In both cases, people get a wider range of choices at lower prices.

It’s obvious that there are too many humans for us to exist on this planet without the kind of trade Mankiw is talking about. There isn’t enough arable land to support the huge number of tiny farms we would need to set this up, even if we wanted to, and I don’t think that’s what people want. And the way Mankiw explains it, it all seems so natural, probably because we’ve been hearing it all our lives. Everyone knows people like to trade for things. Our most ancient ancestors traveled to trade goods, and to party and marry across groups. Codification of this idea goes back at least as far as Adam Smith.

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.
The Wealth Of Nations, Book IV Chapter II, pp. 456-7, paras. 11-12.

As long as you have lots of money and better things to do, that makes sense. If you have spare time and the means, why not grow your own food and make your own cloth, and save your money for things you can’t make? I assume that was the case for many Britons of Smith’s day. As a maxim, I assume it has much older roots. It’s easy to see why people who live in Whitby, England are specialists in making jet jewelry: the jet there is perhaps the finest in the world, and people have been working it into jewelry for centuries. In the same way, it’s easy to understand that a small town in 18th C. England is better off with a professional blacksmith than with a forge in every home.

People in India have been making beautiful cotton textiles for centuries, as I learned from Empire of Cotton by Sven Beckert. Those textiles were shipped around the world for most of recorded history, until what Beckert calls War Capitalism began to take control of it in the 17th Century. For a very brief discussion of the role of cotton in Gandhi’s India, see this.

What we now know is that owners of capital decide where investments are made. With low transportation costs globally, capitalists are able to locate businesses anywhere. The point is that when specialization reaches a certain level, the role of the craftsman comes to a bitter end, replaced by selling fast food or tending children. This is precisely what happened with cotton. Rich merchants stopped importing finished goods, and stopped using independent weavers in distant parts of the world, and built plants with capital intensive machines in Northern England. The price of cotton textiles went down, but millions of India’s workers lost their incomes, and millions of Africans were sold into slavery to raise cheap cotton for shipment to England. Trade didn’t make them better off.

Of course, it happens all the time. One excellent example is aircraft manufacture. Boeing’s principle resource was once its amazing workers, especially its engineers and assembly line workers in northwestern Washington. But its executives wanted the big bucks, so when it came time to build the Dreamliner, they broke that system to replace those skilled workers with cheaper unskilled labor all around the world, and increased their own salaries. Then the entire system broke down. Here’s a timeline of the known failures of the Dreamliner. Currently, Boeing estimates it is losing $23.2 million on each sold aircraft. Much of this can be blamed on stupid management decisions about production. Boeing CEO James McInerny got about $29 million in 2014 compensation, and the chief of commercial aircraft, Ray Connor, got $16 million. This is payment for abject failure. I guess they benefited from trade.

Maybe that’s why Mankiw’s fifth principle is couched in such weak language. Here’s a better statement: trade can make some people better off, especially if we ignore all the people it makes worse off.

We also see how beautifully this principle supports Mirowski’s Eighth Commandment of Neoliberalism: Thou Shalt Keep Thy Cronyism Cosmopolitan, which teaches the importance of free flows of capital. The capital needed to make aircraft and textiles can be sent wherever labor is cheapest, including South Carolina. That’s neoliberal freedom. You will recall that most of the British assault on India was led by the East India Trading Company, an early corporation. These stories tell us that Mankiw’s fifth principle works well with Mirowski’s Tenth Commandment: Thou Shalt Not Blame Monopolies and Corporations. They are simply not responsible for any of the misery their trade policies hurt. And finally, see how Smith’s maxim works with the average person’s understanding of economics, that what is good for the household is good for the nation.

Mankiw’s Principles of Economics Part 2: The Cost of Something Is What You Give Up To Get It

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The introduction to this series is here.
Part 1 is here.

Mankiw’s second principle is The Cost of Something Is What You Give Up To Get It. Mankiw explains that you have to include opportunity costs in your calculations. His example is college: the actual cost of going to college includes tuition, but not necessarily all of the costs of room and board, because you need food and a place to sleep whether or not you go to college. It also includes the money you didn’t earn by going to work instead of going to college.

Before I read Mankiw’s explanation, I thought we were going to get a discussion of the way an economist might calculate costs. That was not to be. Maybe I have to buy his Principles of Microeconomics. In the express language Mankiw chooses, you are the sole standard for calculating costs. That kind of calculation fits perfectly with the neoliberal canon of Philip Mirowski. It’s part of Number 6: Thou Shalt Become The Manager Of Thyself for sure, and it complements Number 3: Thou Shalt Worship “Spontaneous Order”, meaning the market.

Again, non-specialist students will likely remember the principle, and will repeat it mindlessly when talking about value and cost, even though this discussion doesn’t include value or even price. This is a license to ignore all the costs that are not visited upon the neoliberal You. Smoking may not make you sick, but smoking makes some people sick directly and others indirectly. The neoliberal You hopefully doesn’t pay those costs, so they aren’t included in the calculations of the neoliberal You. Computers have a number of components that are dangerous to the health of people. Those costs aren’t paid by the neoliberal You, so they aren’t included in the calculation of costs. Coal burning is a major contributor to climate change, but maybe those costs won’t be paid by the neoliberal You, so they don’t count.

Well, perhaps that wasn’t Mankiw’s intent. He does discuss externalities as something government can correct maybe, sometimes, after a fashion, and at a cost to efficiency. The notion of opportunity costs arises directly from Principle 1: People Face Trade-offs. Most likely the only point of the second principle is to make sure there a nice round ten.

Mankiw’s Ten Principles of Economics 1: People Face Trade-offs

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The introduction to this series is here.

The first of the Ten Principles of Economics laid down by N. Gregory Mankiw is “People Face Trade-Offs”. Principles of Macroeconomics, 6th Ed. 2012, p. 4. In language more suited to a high school textbook than a best-selling college textbook, he provides several examples. If you study economics for five hours, then you can’t spend that time studying something useful, like welding or English Literature. If parents have a certain amount of money, every dollar they spend on rent can’t be saved, or used to buy food. Then, as if society were a person, and faced trade-offs in exactly the same way (government is just like a household) he gives two macro examples. First:

The more a society spends on national defense (guns) to protect its shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home.

There is also a trade-off between a clean environment and a high level of income. If companies have to pay for environmental contamination, they make smaller profits, pay lower wages, or raise prices or some combination. This is the last example:

Another trade-off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society’s members. Emphasis in original.

Mankiw explains this by saying that government policies that help those in need, like unemployment insurance or welfare reduce efficiency, because, and I quote because otherwise you’ll think I’m being snarky:

When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller.

The statement that individuals face trade-offs in consumption of goods and services as well as every other human activity is vacuously true. We get one life, and at any point in time can only do one thing. If we do one thing we cannot do another. So what’s the point of this principle? I think it’s not the principle itself, but the examples. Each supports the principles of neoliberalism, as described by Philip Mirowski in this article.

Mankiw’s first two examples are folksy and disarming. Let’s try a similar version:

Angela has a problem: should she summer with her mom on Martha’s Vineyard, or should she summer with her dad on their ranch in Montana? Jane has a problem: should she pay her utility bill, or should she buy the drugs she needs to control her Parkinson’s Disease? Since these are two individuals, you can see that the problems they face are identical. Both will suffer if they make the wrong decision, and both will suffer anyway because of the knowledge they could have chosen otherwise. The rich and the poor are just the same: people struggling with trade-offs. Or, from Mirowski on neoliberalism: [9] Thou Shalt Know That Inequality Is Natural.

Things get more complicated at the macro level. The third example, guns or butter, is as abstract as the first two are concrete. Mankiw makes it seem that “defense” is a consumer good, like Hummel Figurines or orange marmalade. The government just goes down to the defense store and buys as much as it wants. He doesn’t talk about how those decisions get made at the social level, and doesn’t talk about who gets the benefits of those guns and who pays the costs of the foregone butter, or whether there are better ways to keep aggressors away than bombing their countries. He turns the example into a concrete fact, with no context. The choices made in the US and other countries about how much “defense” to “buy” would make a really interesting case study in macroeconomic behavior, and just defining terms would be really helpful to public discourse. That’s certainly not the point of the Mankiw textbook.

One of the goals of neoliberalism, Mirowski’s Number 5, is to change the idea of democracy from one of participation by citizens in determination of social policy to one of consuming state services, like defense. Guns v. butter shows how that notion gets into people’s heads. Given the level of corruption in the system, in the broad sense of Zephyr Teachout in her excellent book, Corruption in America, it’s also an example of crony capitalism, part of Number 8. There’s a lot more to unpack in the guns and butter example, but let’s move on.

The environmental example is fascinating. From the very beginning of this country, companies polluted lakes, rivers and the air, to keep costs low and prices down. No one did anything. Then when citizens started complaining about their ability to breathe the air and drink the water, and the rich people and their corporations act all outraged, like they have a right to pollute. Mankiw ignores this history, and ignores the obvious fact that dumping pollutants everywhere hurts everyone in general, and some people dramatically; and profits only a few. Again, the entire issue of pollution and environmental destruction would make fascinating case studies in economics. Mankiw’s discussion supports Mirowski number 10: Thou Shalt Not Blame Monopolies and Corporations.

Finally, there is the trade-off between equality and efficiency. Mankiw’s explanation about the negative effects of a progressive income tax on economic efficiency is flatly wrong. For my explanation, see this and this and this. For a short view, does Mankiw think the economy in the 50s was less efficient strictly because of high income and estate taxes on the rich? I’d love to see a paper showing how that happened. Piketty and Saez suggest a top tax rate of 80%. Here’s a short article explaining their thinking, and here’s an impenetrable paper that lies below it.

I assume Mankiw was referencing Arthur Okun’s 1975 book Equality and Efficiency: The Big Trade-Off. Okun postulated that there was a trade-off between equality and economic efficiency from his armchair, and he discusses the implications for policy in this excellent piece. By 1995, it was clear that the facts did not support his speculation. This paper is a review of literature and discussion of exactly how wrong Okun was: Lars Osburg, The Equity/Efficiency Trade-off in Retrospect. Subsequent work has made this even more clear. Mankiw ignores all the evidence and new theory to the contrary, choosing to continue to support an unmeasured armchair theory Mirowski number 9: Thou Shalt know that Inequality is Natural.

The point of this discussion is that textbooks have an outsized influence on people, particularly on non-specialists. They may not recall the argument, but they will recall the examples and the general approach, especially when those are common in discourse, and not contravened by other authorities. I know this from my own college education. It has taken years for me to shed the parts that don’t conform to the reality of life as I have lived it and seen it.