Tuesday, July 09, 2013

Yowser! Michael Lind sure took a lousy Econ 101 class.

Lind has a piece in Salon called Econ 101 is killing America (not making this up). Well, I just got done teaching Econ 101 this summer. Let's see how I did.

Here are some of Lind's claims of the country-killing myths that are taught in Econ 101:

1. All profitable activities are good for the economy.

Not guilty.

We spent a lot of time on externalities and how private and social incentives do not always coincide. We also talked about rent-seeking, lobbying, and the mess our financial sector had become by the 2007 crisis.

2. Monopolies & Oligopolies are always bad because they distort prices.

Not guilty.

We discussed how economies of scale can make monopolies more efficient than a bunch of smaller firms. We had a chapter about Network goods and how the competition is for the market rather than in the market. We talked about how monopolies are often transient and about contestable markets.

3. Low wages are good for the economy.

Not guilty.

We discussed cross-country wage differentials pointing out how productivity differences (from differing amounts of physical and human capital) cause wage differentials on similar-seeming jobs. I pointed out how Mexico should be humiliated instead of bragging about how their wages were becoming lower than China's.

4. Trade is always win-win.

Not guilty.

We talked about the shortcomings of simple models which assume workers are homogeneous, have no preference over job type or location, and don't suffer unemployment or relocation costs when production patterns change.

5. Economics is a science.

Not guilty. Never discussed it one way or the other. Don't see any reason to in principles class.

There are 5 others, but I'ma call it quits for now.

All I can say is Mr. Lind should ask for his money back. Any econ 101 class which argued for the points discussed above is a misleading class that does not well-serve the students.

The Cowen and Tabarrok micro text  I used is really good overall and excellent at dispelling myths 1-3 above, but I must confess a tinge of disappointment on its coverage of trade.



16 comments:

doclawson said...

Ok fine. Externalities, economies of scale and networking, blah, blah, blah.

If you went through life thinking "all profitable activities are good", "all monopolies are bad", and "all trade is win-win", you would be a BETTER economist than most people who believe "all profitable activities are bad", "all monopolies are good", and "all trade is win-lose."

I see a large part of the goal of ECON 101 as undoing these folk mythologies even if we paint a caricature in the process. Save the "yeah, buts" for intermediate theory.

Angus said...

Bob: I respectfully disagree. The fact that others are vehemently wrong in the opposite direction never justifies for me exaggerating the case.

Anonymous said...

How does the fact that some models assume homogenous workers refute the fact that all trade is win-win? If a transaction was voluntary (or "euvoluntary"), it must have been (seemingly) preferable to engaging in non-trade, or else the traders wouldn't trade! If there was fraud, or one or both of the parties forgot to account for a cost, that's another matter altogether.

The article disses the idea of win-win trade by bringing the fact that literally every country in the world is protectionist and pursues an industrial policy. This has literally no bearing on whether the fact that if two parties voluntarily agree to trade, each expects to become better off because of the transaction.

Garrett Petersen said...

I was just about to leave the same comment as the one above. Trade IS win-win!

Angus said...

Anon & Garrison: you should ask for your money back from your econ 101 teachers as well.

How is trade a win for the auto worker who loses his job and after a long period of unemployment gets a much worse job?

Check out the H-O model. It won't hurt you.

Anonymous said...

Hmmmm... by this logic, all trade would be negative to someone somewhere. By reading this blog I am using resources that someone else cannot. I shall tell my kids that we shall not eat again until everyone can eat.

Does your H-O model include all the benefits of trade your auto worker enjoyed while he was employed?

Gerardo said...

In equilibrium it would appear that everyone is better off, of course. But people can and do make bad decisions, specialize in the wrong area, are the 'victims' of market fluctuations, fail collectively to understand or internalize external costs, and all sorts of other blips. Even in my classroom experiments where the logic is transparent and the trading ratios work out to 1:1, I can assure you that everyone does not wind up better off than they would be under a no-trade regime.

The idea that all trade is always win-win is almost as disturbing as the army of Straw Men and related idiocy of that Salon article.

Angus said...

Anon: if you have taken an econ course, you really do have grounds to sue whoever offered it.

Global GDP rising simply does NOT equal everyone being better off. Factor Price Equalization and all that.

God I wish the H-O model was mine. I'd have a much better job.

Anonymous said...

The auto worker who after extended unemployed gets a worse job obviously preferred that job to remaining unemployed. *That* is the relevant trade for the autoworker--unemployment for employment. *Not* some no longer extant "good" job for a "worse" one.

Gerardo, you cannot have an experiment where you are imposing arbitrary values to prove that all trade is not won-win. The fact of the matter is the only reason anyone partakes in trade is because they expect to be better off than not trading. If I genuinely thought I would become worse off by transacting then I will simply not transact. Again, that people make mistakes in judging the present and predicting the future has *no bearing whatsoever* on the mere fact that the only reason anyone participates in (voluntary) trade is because they believe they will be better off than of they abstain from trading.

If I (voluntarily) trade $10 for a widget its because I (subjectively) value the widget more than $10, and the person who sold me the widget valued the $10 more than the widget. This is all that's meant by "all trade is win-win". This is the vast majority of transactions in any functioning economy. But, if it turns out that I later find out I had made a mistake in valuation, or that I was a victim to fraud, it is a completely different issue. These are issues of either poor forecasting or ethical or legal issues. Yet despite this, at the moment of trade, the only reason I participated was because I expected to gain.

Maybe you are the ones who need a refresher in Econ 101.

Angus said...

An @anon army of one. Fight on brave knight.

Anon said...

I feel as though you just have not understood my critique of your position. (I'm the anon of 11:43 and 5:38. The anon at 3:13 was a different person.)

I posit that when two parties voluntarily trade, each regards that which he is giving up to be of lesser value of that which he is receiving. To me (and others like me), this qualifies as a win-win. And because there is no reason to engage in voluntary trade unless you expect to gain from it, this conclusion is generalizable to "all trade is win-win".

On the other hand, you seem to be saying that because some people trade for things that aren't their first preference, or must trade because of changing production patterns (without specifying how or why the production patterns are changing), then that's evidence that not all trade is win-win.

But I think you're misunderstanding a key element in your analysis. What you're proposing is really that sometimes the conditions leading up to trade are unfavourable to the one of the parties involved. An autoworker's employer goes out of business, or a stamp collector's child requires expensive medical treatment, or a beeper salesman runs out of customers.

But the circumstances leading up to trade do not challenge my initial proposition--that people only trade because they expect to enhance their own state of affairs.

There is no need to assume factor price equalization. Or to consider the ramifications of rising global GDP. Or to assume perfect competition (as FPE and H-O require).

The only assumption is people act in order to alleviate a felt unhappiness. Trade is an action. Ergo, people trade in order to alleviate a felt unhappiness. Ergo, each party in a trade must feel as though trade will result in less unhappiness. Thus all trade is win-win.

Pelsmin said...

Angus,
I'm all for snarky put-downs, but you need to keep Skitt's law (or some variant of it) in mind when you're correcting someone so harshly. Anon (Please -- this is why names were created! Just make one up!) is right on the money. Trade is win-win, which doesn't mean every party associated with the traders must also individually win, and everyone associated with the associates must win. The two parties trading win because they believe they will come out ahead, as described clearly by Anon. Ceteris paribus, they will, in the long run, on average.

If a car company starts buying parts from overseas, rather than getting them from the union workers, some may lose their jobs. But the car company made the trade, not the worker. They came out ahead. As for any argument about externalities, that trade still created net gain in wealth. If you want to point to the lost union job, I'll point to the cheaper, better cars people can buy. If the criteria to be "win-win" is that all people must end up better off, then the answer is "all trade is lose-lose" because someone, somewhere is hurt by every trade, if only the next guy who didn't get to do the deal. And Gerardo, nothing can meet the standard of "always" better off. As noted, there are mistakes, fraud, bad cost accountants. But like water seeking its own level, those who make good trades continue, those who make bad trades die off. In general, in the long run, all else equal, trade is good.

And if I have to sue my econ teacher, I have a feeling I'd have to settle for a used Mustang and a well-oiled AR-15.

Seth said...

It's been a long time since Econ 101, so forgive my Econ 101 prof and my memory. But, this did interest me and I'm curious as to why I'm not agreeing with you.

"How is trade a win for the auto worker who loses his job and after a long period of unemployment gets a much worse job?"

First, this seems to equivocate between a single trade involving voluntary trading partners and trade in aggregate, including folks who were not part of the voluntary trade.

A trade is win-win to the voluntary parties. Sure, it can also be win-win-lose, with that 3rd party being someone who was not involved in the voluntary part of the trade, but the two voluntary parties still benefited. Is that all you are saying? That sometimes third parties who were not part of the voluntary part of the trade are sometimes made worse off by a trade?

Second, why did the worker have a long period of unemployment and a worse job?

If his preferences come into play, isn't that part of the value equation? If I turn down a job because I prefer not to move, aren't I really just saying that the trade doesn't add value for me? In that sense, it seems like we're confusing monetary value and perceived value.

Anonymous said...

Trade is an expected win win between the voluntarily participating parties. However, there are circumstantial losers, namely those who are not chosen. Every time I buy a coke every single person on earth who hoped to make a dime by selling me a drink can say they lost out on an opportunity. Billions of lost opportunities! The horror.

Note though that they did not actually get harmed. They just lost an opportunity for a present or future gain. The same situation occurs in romance. We compete for partners, and when we mutually agree, every person on earth who would have desired either partner loses (and every person who didn't want to compete with your mate gained).

There is a class of harm which is circumstantial or lost opportunity. It is inherent in markets, science, romance, sports and various non zero (read potentially positive sum) games.

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