The Economics Anti-Textbook: A Critical Thinker’s Guide to Microeconomics, by Rod Hill and Tony Myatt

It was the perfect “natural experiment:” in April 1992, New Jersey’s minimum-wage was scheduled to rise from $4.25 an hour to $5.05, while neighboring Pennsylvania’s minimum wage remained unchanged. Princeton economists David Card and Alan Krueger surveyed over 400 fast food outlets in both states, before and after the increase, in order to test the conventional economic wisdom that minimum wages cause unemployment. What did they find? No apparent effect on employment. None. Zip. Economic hell broke loose; Card and Krueger were accused of practicing “politically correct” economics, slanting or faking their results. But a number of subsequent studies have confirmed their results; others have supported the conventional model. What’s going on?

In their entertaining and readable “Anti-Textbook,” Canadian economists Rod Hill and Tony Myatt first present the conventional models of introductory microeconomics textbooks and then skewer them, drawing on a wide range of resources.

Let’s start where textbooks start, with “perfect competition.” This model assumes a single product—such as a “widget”—sold and bought by a vast number of sellers and buyers, no one of them large enough to influence the price. It assumes these sellers and buyers are fully informed and perfectly rational. It also assumes no spillovers from the market such as pollution. Under these assumptions a market will generate maximum consumer satisfaction with maximally efficient use of resources. Textbook authors of course know that no such market has ever existed. But they justify assuming perfect competition on the grounds that it is simple and illustrates the basic tendency of markets.

In the real world, even with the Internet, markets are mostly local, with only a handful of sellers or buyers. Products are not uniform; even the textbook example of wheat collides with the reality of many different grades of wheat growing in different locations and ripening in different seasons. Virtually all consumer products in come in distinct brands, such as Land O’ Lakes and Breakstone butter. Market participants come in different sizes and may include monopolists – single sellers – and monopsonists – single buyers – who can push prices up or down to their own advantage. Moreover these monopolists and monopsonists often have political power sufficient to write regulatory and tax rules to their advantage.

But does it really make a difference? Return to the case of New Jersey’s minimum-wage. Fast food outlets like McDonald’s or Burger King have some monopsony power in the low-wage labor market. That means they don’t face a single “market” wage; they can choose pay rates within a range. Lower rates save money; at higher rates employees will work harder and quit less often. Thus even a significant increase in the minimum wage may simply push employers up the wage range without measurably affecting employment. The same argument in reverse goes for that other nemesis of economists: rent control. Because landlords have at least some local monopoly power—I’m speaking as a former New York City landlord—there’s a range of rents that will keep apartments full without creating an obvious “shortage.” (Of course there’s one big difference between minimum wages and rent control: steady inflation can simultaneously take the bite out of minimum wages and push rent control to destructive levels.)

What about the assumption of perfect rationality and perfect information—including perfect foresight? For decades behavioral economists have demonstrated that we humans often yield to emotions and operate on rules of thumb because it’s too difficult to get full information. Does it matter? Hill and Myatt detail how emotion and mental shortcuts brought us the bubble and crash of 2008. And the assumption that humans behave rationally—in the aggregate at least—blinded most economists, including Fed chair Alan Greenspan.

Textbooks assume we must judge markets solely by efficiency, not fairness or effect on inequality. But wait a moment, what about economists’ favorite measure of fairness, “Pareto optimality,” originated by Italian nobleman Vilfredo Pareto? A situation is “Pareto optimal” if there’s no change that can make one person better off without making someone else worse off. Sounds fair, doesn’t it? But by that logic the North should have paid the South to free the slaves! In short, Pareto optimality starts with the status quo, no matter how cruel or illegitimate.

I especially recommend Hill and Myatt’s last chapter, on Trade and Globalization. The British classical economists like Adam Smith and David Ricardo clearly meant by “free trade” the arm’s length trade in commodities like wheat, iron, coal, cloth or wine—trade that could bring huge cost savings through specialization and breaking of monopolies. Ironically they were promoting free trade at the same time that England led the pack of Europeans in conquering and exploiting overseas colonies. Today, the colonial empires are gone in name but not in reality, as multinational corporations collaborate in secret with national governments to write the rules of trade in their favor—for example in the so-called Trans-Pacific Partnership.

So why, Hill and Myatt ask, do introductory textbooks stick to such outworn myths? The primary reason must be the need to appear objective and apolitical—to keep up the pretense that economics is a “science.” Thus controversial subjects like monopoly, or political power, or global warming, or inequality appear, if at all, in final chapters that the instructor may not reach. That may sit just fine with the giant publishers like Macmillan/McGraw-Hill, who extract $150 to over $200 from Ec. 1 students. Fortunately, The Economics Anti-Textbook sells on (monopolist) Amazon for $24.57 paperback and $23.34 Kindle, and half or less from used booksellers like abebooks.com. Now there’s real competition!

 

Polly Cleveland: It Takes Government to Create Markets

When the US Army blasted into Baghdad in 2003, expelling Saddam’s Baathist regime, Defense Secretary Donald Rumsfeld expected “free markets” to pop up all over. Instead, he got looting, murder, and chaos. So much for the neocon myth that markets are “natural,” requiring only the absence of “government interference.”

In The Surprising Design of Market Economies, urban journalist Alex Marshall shows how in fact it always takes government—even bad government—to create and maintain markets. The idealized “free market” we meet in Ec. 1, with its large numbers of well-informed competing buyers and sellers—that kind of market would not exist without intensive government support and regulation. I provided an example in my post on Public Meat Markets in Old New York.

From the earliest times, government—at first perhaps just the local warlord—has at least provided a safe physical space for trade. Before 2000 BC, Chinese, Egyptian, and Babylonian governments not only established market places; they also built roads and canals to them. They created and enforced systems of weights and measures, and even forms of money. They also drew up sets of rules, such as the Code of Hammurabi, and provided courts to resolve disputes. Later, under the Roman Empire, of course Christ found money-changers in the temple courtyard, along with all sorts of other merchants—because that was a nice, safe, central location for a market.

As Marshall points out, government creates and enforces titles or “rights” to property. If we don’t have the right to own something, we can’t trade it. Most critically, rulers of early civilizations created land titles, that is, they arbitrarily carved the earth’s surface into parcels, assigned owners, recorded them in central registries—and used the information to collect taxes. When William I conquered England in 1066, he recorded his new property in the Domesday Book. This allowed him to grant lands to his nobles as a privilege, conditioned on their military support. Only in the last two centuries did private citizens of developed countries gain the right to hold, buy and sell real estate “in fee simple.” (Or rather men gained the right—most women had to wait.)

In Ec. 1, we study markets in a spaceless, timeless vacuum. In the real world, infrastructure precedes markets. Hurricane Sandy reminded us that markets and even life in New York screech to a halt when we lose electricity, telephone, water, sewers, subways, roads, police, fire protection, or hospitals. In the longer run, public schools ensure another market essential: a literate and skilled population sharing basic values. Marshall notes that English language requirements in schools, much as they may offend multiculturalists, teach us a common vocabulary and foster the rapid inclusion of immigrants.

Corporations are no more “natural” than markets. Originally, governments chartered corporations only for specified public purposes. William I chartered the City of London in 1075; James I chartered the colony of Jamestown in 1606. In the US, only in the 19th century did state governments begin to grant private owners a right to incorporate—setting off a race to the bottom in lax requirements—a race won by Delaware. Yet, corporations aren’t the only viable form of economic organization. Marshall examines cooperatives like Land O’Lakes, which thrive especially well in Wisconsin and neighboring states with a German or Swedish heritage. I myself spent a summer studying cooperatives in the ancient northern Italian city of Bologna, center of the Emilia-Romagna region. Cooperatives big and small dominate this original “Red” region of Italy, making it among the most productive and prosperous parts of the European Union.

Like Adam Smith, Marshall decries the excess of government-granted monopolies like patents and copyrights. While these may or may not have some short term justification as rewards to innovators, today they enable the One Percent to block competition and vacuum up wealth. Surprisingly, unlike Smith, Marshall does not address another powerful way governments shape markets: taxation. Smith opposed tariffs and excise taxes, which “obstruct the industry of the people.” Smith favored “the most equitable of all taxes”: taxes on land—which he regarded as just payment to the state for the privilege of secure titles. Henry George and later economists argued that land taxes actually make markets function better by counteracting resource monopolies.

As for international markets, a few years ago my step-daughter, a US State Department attorney, spent a year at the Hague Conference on Private International Law. There she helped draft the 2005 Convention on Choice of Court Agreements. Since 1893, the Hague Conference has been churning out conventions—which become international treaties when adopted. These are just a small part of what Marshall calls “the dense forest of rules and regulations” that make possible international trade. We couldn’t even send Christmas cards to our English nephews without the Universal Postal Union of 1878!

If government creates markets, then we the people should force government to create better markets, ones that serve us all. Marshall offers a number of proposals. For example, shouldn’t large corporations have national charters? A “US National Companies Act” could require companies operating in the US to meet certain standards—putting an end to tax evasion via Bahamian post office boxes.

Conventional economics wittingly or unwittingly provides cover for the One Percent, by professing that “the market” operates benevolently on its own. Alex Marshall gives us an entertaining, thoughtful, and well-written antidote to this dangerous abstraction.