Map of the day : the world’s billionairs
September 28, 2014
from David Ruccio
This map of the world’s billionaires—all 2,325 of them (an all-time record high), with a total wealth of $7.3 trillion (which is higher than the market capitalization of all the companies that make up the Dow Jones Industrial Average)—comes from the new census by Wealth-X and UBS
The psychological “foundations” for neoclassical economics
September 27, 2014
from Neva Goodwin
When I was beginning my studies in this field economist Robert Solow commented to me that the great strength of economics is that it is fully axiomatized; the entire edifice can be deduced from the basic rationality axiom, which says that rational economic man maximizes his utility. The origin of this axiom is often traced back to Smith, whose most widely quoted phrase comes from a passage in which Smith approvingly notes that merchants take what, today, we would call, a protectionist position – doing so, not with any thought for the good of society, but because their security and profit is tied to domestic industry. Thus, he says, the merchant “is in this as in many other cases, led by an invisible hand to promote an end which is no part of his intention.”[1]Excerpts such as this have been used as a justification for the 20th century economic model’s vision of an ideal world in which a society comprised of entirely self-interested economic actors would make the society as a whole better off, and the idea that pursuit of self-interest is the only thing that is done by rational economic actors – and that anything else is irrational.
When Alfred Marshall set out to codify the ideas of the economists before him, his starting point regarding human nature was essentially the same as Smith’s, with one interesting addition: Marshall took cognizance of a particular group of humans – economists; a group that did not exist, as such in Smith’s time. Though Marshall did not say so directly, it is evident from his writings that he assumed that the motivation for this particular group was to improve the human condition; specifically, to reduce poverty so as to allow people to develop their higher moral and intellectual faculties, rather than being condemned to lives of desperate effort for simple survival.
Traces of this optimistic view of economists’ motivations can be found in most texts since Marshall’s time, but they were increasingly buried beneath the far more pessimistic and narrow view of human nature in general that came in with Samuelson (even though Samuelson, as a person, would fit reasonably well within Marshall’s optimistic view about the character and motivations of economists).
The problem was the old desire, stemming from the beginning of the 20th century, to make economics truly a science, in the model of physics. As Philip Mirowski has spelled out[2], neoclassical economics clung to a physics template from the 19th century which natural scientists had mostly discarded by the early 20th. Among the problems with that template (and they were many) was a positivist view of knowledge – a view that physicists themselves largely abandoned as they confronted the indeterminacies rife in quantum mechanics, general relativity, chaos theory, Heisenberg’s uncertainty principle, etc.. The natural sciences have largely come to recognize that their practitioners are human beings, who have values, and that value-free science is virtually impossible. Neoclassical economics got stuck in an attachment to mathematics as the way to ignore the roles of values, history, institutions, politics, and other inconvenient subjects. Mathematics has much to offer to economics, but it is unlikely to find its best use when thus employed as a means of denial.
[1] To give the flavor of the full quote: “As every individual … therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, [as in many other cases] led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.” Adam Smith, 1982, The Glasgow edition of the Works and Correspondence of Adam Smith, Oxford University Press. vol.2a, p. 456.
As an example of the widespread misuse of Smith’s writing, it is interesting to note that people often refer to the “invisible hand” in arguments that cite Smith as aproponent of free trade – ignoring that Smith’s use of the phrase speaks approvingly of protectionist merchants.
[2] In More Heat Than Light: Economics as Social Physics, Physics as Nature’s Economics; Cambridge University Press, 1989
Neva Goodwin, “The human element in the new economics: a 60-year refresh for economic thinking and teaching”, real-world economics review, issue no. 68, 21 August 2014, pp. 98-118,
http://www.paecon.net/PAEReview/issue68/Goodwin68.pdf
Americans have no idea how unequal the distribution of income is.
September 26, 2014
from David Ruccio
Americans have no idea how unequal the distribution of income is. At the same time, they want a distribution of income that is much more equal than it currently is.
According to a new study by Sorapop Kiatpongsan and Michael I. Norton [pdf], where they looked at the estimated and ideal pay ratios of CEOs and unskilled workers, American respondents estimated the ratio of estimated incomes of CEOs to unskilled workers to be 29.6, whereas the actual ratio was about 354 (based on the fact that the average yearly compensation for CEOs of S&P 500 companies in 2012 was $12.3 million while the average worker received about $35,000). Their ideal pay ratio was only 7.
In other words, Americans think that CEOs should receive about 7 times what the average worker brings home, imagine that the actual ratio is much higher (by a factor of about four), while the actual ratio is far higher than either what they think it is (by a factor of twelve) and what the ideal would be (by a factor of over fifty).
As it turns out, Americans are not alone.
Using survey data from 40 countries (N = 55,238), we compare respondents’ estimates of the wages of people in different occupations – chief executive officers, cabinet ministers, and unskilled workers – to their ideals for what those wages should be. We show that ideal pay gaps between skilled and unskilled workers are significantly smaller than estimated pay gaps, and that there is consensus across countries, socioeconomic status, and political beliefs for ideal pay ratios. Moreover, data from 16 countries reveals that people dramatically underestimate actual pay inequality.
The task, of course, is to figure out how to close the enormous gap between the actual level of inequality and what people think the amount of inequality should be. We can start by giving workers more say in running the enterprises where they are employed.
US DROPS OUT OF TEN MOST EDUCATED COUNTRIES ON EARTH!