This just in...D&S reads the news (#10)

by Dollars and Sense

The tenth in a series of blog entries by D&S collective member Larry Peterson.

What is it with economics-based periodicals? The Economist insists on calling itself a newspaper, while it shed any passing similarity with that format—one, I might add, that Karl Marx was intimately familiar with in the mid-nineteenth century—generations ago. More recently, Challenge, The Magazine of Economic Affairs, a bi-monthly with all the characteristics of an academic journal, has just celebrated its 50th edition. Some congratulations are in order: Challenge is definitely a publication to keep one’s eye on. Crammed with an editorial board of Nobel-laureates (Joseph Stiglitz, Robert Solow, Paul Samuelson, Kenneth Arrow) in economics, the journal—sorry, "magazine"—seems to be dedicated to opening the everyday boundaries of conventional economics beyond the application of time-honored (some of us would say –worn) textbook axioms. In this sense, it is a great read for lefties who feel the need to stay current with conventional economics (Challenge is fantastic at summarizing all those little formulations you need to brush up on so often, from the Hecksher-Olin theorem to good old Pareto optimality, and it does so in a way that doesn't put you to sleep or want to bash the writer’s head against the wall—indeed, it has a pronounced social conscience). But it is certainly weird: most writers seem to be of the persuasion that markets ultimately allocate resources and weath in the most efficient and even fair manner. The only problem is that it's virtually impossible, with all the information and power asymmetries and externalities that can crop up in any exchange, to establish a durable, tolerably just and yet efficient market. So most Challenge writers and editors look to a vigorous public sector to create institutions that will be optimal at creating, nurturing and maintaining these acceptably friction-free market opportunities. But, at the end of the day, you leave these folks scratching your head: it's a bit like being asked to achieve cold (sic) fusion with the aid of a physics that's not even Newtonian, never mind one that accounts for quantum phenomena.

Anyway, I wanted to discuss two pieces in the current issue of Challenge. The first is an interview conducted with Oxford economist Avner Offer on his new book, The Challenge of Affluence. Offer’s book is an attempt to interrogate the "Easterlin Paradox," which notes the tendency of a rising standard of living to lower objective standards of well being. While there are many interesting points made in the interview, the one I want to focus on here deals intimately with the traditional conception of consumer choice. This notion, based on the idea of diminishing marginal utility, states that further consumption of a good beyond a certain level will produce less and less satisfaction—or less utility—than the increment that preceded it. Most classic examples refer to food: the first hors d'oeuvre is exquisite, but if you have ten of them they begin to lose their taste. Accordingly, such notions of consumer behavior tend to be decidedly linear and compartmentalized: choice A at T1 leads attains a level of utility corresponding to it alone; choice B at T2 likewise. There is little by way of feedback or interrelations between wants (that I know of, anyway), except notions of baskets of goods and the like. Offer makes the very interesting point that, especially in consumer societies, we spend a lot more time—and money—reversing the choices we have already made. Accordingly, choices that, according to the conventional conception, are essentially costless, must be seen in terms of their costs, if their true economic significance is to understood. So the conventional theory is doubly misleading: choices are not only unable to be distinguished as unilinear temporal sequences with no feedback loops, but that there is often a significant opportunity cost involved if consumers are not aware of such a possibility. And in consumer society, where every potential purchase is dressed up a "unique" experience, it is hardly surprising that such costs become very heavy indeed, and de-couple totally from any measures of well-being. If anyone is interested in this kind of thinking, and does not want to navigate the more technical—but still quite accessible—points made by Offer (not to mention the subscriber-only access), Dollars & Sense published an article by Jonathan Rowe in 1999 which anticipated, in mostly peripheral ways, some of the concerns Offer would voice in the Challenge interview.

The other article I wanted to mention was John Connor’s "Woe for the Working Classes." Besides the elegiac title, I would call attention to another notorious axiom of conventional economics that ordinary people have trouble squaring with actual experience: the notion that there is a trade-off between work and leisure that resolves strictly into income effect or substitution effects (labor and leisure being considered rival goods). According to such a notion, the decision to work is pretty much exhausted by considerations of lost wealth or leisure alone, and issues pertaining to compulsion or even exploitation are pushed all the further into the background. Such reasoning, despite its pretty patent divorce from reality in many cases, is readily applied by economists when they speak of low wage work and welfare. But Connor, in this article, turns the tables, and applies it to the elites: studies he cites suggest that there is no evidence that tax increases reduce the work effort of high-income earners. 

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5/15/2007 12:33:00 PM