Monday, January 10, 2011

'Standard' does not mean 'sound'

Eric Schoenberg is raising some important points:
[Greg] Mankiw concisely summarizes the theory underlying the ethical argument for market capitalism: "under a standard set of assumptions... the factors of production [i.e., workers] are paid the value of their marginal product... One might easily conclude that, under these idealized conditions, each person receives his just deserts." Mankiw's long-standing opposition to higher taxes on the wealthy suggests that he thinks these conditions usually pertain in the real world, too.

Consider me skeptical. The list of "standard assumptions" open to question is long... I believe, progressives must directly challenge the claim that unfettered markets create just deserts. This won't be easy. Free market fundamentalists have the advantage of a simple message -- ending bailouts will deliver just deserts -- and of nearly limitless funds from rich folks who benefited from the bailout but are happy to claim that it should never happen again.
Mankiw's assumptions may all be correct, but they are not all self-evident. Some are at odds with experience. Some are in conflict with findings from related fields like psychology and behaviorial economics. Some are just hard to buy. These are the kind of assumptions that need to be stated and supported.

As mentioned before, the way language is used in the debate compounds the problem. The 'free-market fundamentalists' (to use Schoenberg's phrase) often affect a folksy, plain-spoken tone. They make common-sense statements like "people are rational" or "people respond to incentives." They generally don't add that they are using these terms in a technical, highly specialized sense.


  1. An often neglected aspect of these standard assumptions is that they are *sufficient* not necessary conditions. Perfect information, for example, might not exist, but that doesn't mean there won't be an equilibrium capturing all the potential gains from exchange. For this reason, progressives might we be wise to change their strategy (though I generally agree with Mankiw's conclusions).

  2. I generally think that the moral underpinnings of the "just dessert" argument need to have a lot more examination. Inherited, illegal, or chance acquired wealth would seem to violate this norm of meritocracy. Even Ayn Rand had issues with wealth that was obtained by corruption of the political process and sustained by the same. Evaluating merit is hard, and assuming that wealth is a marker for merit is very dangerous . . .