Greg Mankiw’s libertarian quasi philosophy

10 Feb, 2015 at 11:25 | Posted in Economics | 6 Comments

As yours truly has commented on earlier, walked-out Harvard economist and George Bush advisor Greg Mankiw is having problems with explaining the rising inequality we have seen for the last 30 years in both the US and elsewhere in Western societies, that says it . He writes:

Even if the income gains are in the top 1 percent, why does that imply that the right story is not about education?

I then realized that Paul is making an implicit assumption–that the return to education is deterministic. If indeed a year of schooling guaranteed you precisely a 10 percent increase in earnings, then there is no way increasing education by a few years could move you from the middle class to the top 1 percent.

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

This is, of course, nothing but evasion, trying to explain away a very disturbing structural shift that has taken place in our societies. And change that has very little to do with stochastic returns to education. Those were in place also 30 or 40 years ago. At that time they meant that perhaps a CEO earned 10-12 times what “ordinary” people earns. Today it means that they perhaps earn 100-200 times what “ordinary” people earns. A question of education? No way! It is a question of greed and a lost sense of a common project of building a sustainable society. A result of stochastic returns to education? No, this has to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite.

Mankiw has stubbornly refused to nudge on his libertarian stance on this issue. And obviously yours truly is not the only economist who is critical:

I have let Greg Mankiw’s latest piece for the New York Times simmer in my brain for a few days, and now I have to let some of the noxious vapors escape.

Here’s what he says. Most economic choices are complex, with positive and negative effects on many parties. The utilitarian calculus, the greatest good for the greatest number, doesn’t work, because it means helping some people by hurting others. Unless there is a clear case of market failure—externalities—it is best to defer to the voluntary choices made by individuals in a free market.

What makes it difficult to respond is the multitude of errors and omissions in the Mankiw formulation. It’s hard to know where to begin, so let me just make a list. All of these are interconnected, of course, so the whole list is more than the sum of its elements.

1. Externalities are not the only market failure! It’s scary that one of the planet’s most widely read undergraduate textbook authors could say this. For the record, you’ve also got imperfect competition, public goods and asymmetric information, and together they apply to a lot of economic terrain.

2. A different issue, not yet classified under market failure, is multiplicity of equilibrium. I’ve written a lot on this in the past and won’t repeat myself here, but interaction effects between economic agents, as well as the goods and services they produce, routinely make possible potential returns to collective action. To not see this is to not see the “social” in social science.

3. It is true that market transactions, if participants are self-interested and rational, filter out possible actions that make some better off at the expense of others. But surely to rule out all social change that is not voluntarily accepted on all sides is to commit to an extreme conservatism. The world we live in is the product of the past, with all the irrationalities and inequalities that have been transmitted to us by history. Maybe, just maybe, we might want to rectify some of them, even if history’s beneficiaries are against it.

4. Embedded in Mankiw’s quasi-libertarianism is a profound distrust of democracy. No one, he says, can reasonably weigh the competing claims of the winners and losers from a policy proposal. Well, that’s what democracy is supposed to do. In theory, we discuss it. We ask people to not simply assert their interests but give reasons why society should defer to them, and then we assess these reasons. Obviously, actually existing democracy falls far short of the ideal, but its performance is not completely worthless, and there is untapped potential even in existing institutions to do this job a lot better. It isn’t hard to find examples from modern history where democracies have risen to the occasion and brought about social change that, in hindsight, most of us now endorse. I sentence Mankiw to 40 hours of mandatory service to his own brain, in the form of reading John Dewey on democratic theory. He can get started here.

I can see the value in giving people plenty of scope to make voluntarily arrangements with one another. There is real freedom involved, and it’s important that there be lots of opportunities for individuals to take initiative as they see fit. But this is one value among several, and its weight varies from one policy context to the next. Knee-jerk libertarianism is simply lazy philosophy.

Peter Dorman