Know what you’re teaching

Matías Vernengo

Greg Mankiw wrote a response to his students, who protested his teaching, in his last New York Times column.  He basically blames the students for not knowing enough economics. He goes on to say that the complaints of the Occupy Wall Street (OWS) movement, in support of which the students had boycotted his class, are also a “grab bag of anti-establishment platitudes without much hard-headed analysis or clear policy prescriptions.”

He also suggested that students boycotted the wrong class, since his lecture that day was on inequality. Note that his views on inequality are strictly based on conventional mainstream neoclassical theory. Inequality for him is based on education (see here his critique of Krugman’s views on inequality). So basically the top 1% are more educated, more productive and, as a result, receive more. You cannot protest market forces.

Income distribution, according to neoclassical theory, is determined by the relative productivity of the factors of production. If wages are stagnant it must result from the fact that labor productivity is also sluggish. However, the evidence for that is thin at best. As it is well known, labor productivity has increased over the last 30 years in the US, while real wages have not budged.

Krugman, in his book (not the blog) The Conscience of a Liberal, makes the point that rising inequality has been driven by political factors, something that several heterodox economists, like the late David Gordon in his Fat and Mean, and Jamie Galbraith in Created Unequal, had also emphasized before. In this view, political protest for higher taxes on the wealthy, and less transfers to the financial sector may be quite reasonable. Not only do the views of OWS better fit the evidence, they also do not rely on the broken link between relative productivity and remuneration, which has serious logical problems as admitted by Paul Samuelson, an economist that for Mankiw is intellectually above anybody alive, including him (yes, he is humble too!).

Why is this important at all? Because Mankiw’s reply to his students and his views of the OWS are very revealing of the problems of the economics profession, which has failed so dismally in the face of the worst crisis since the Great Depression (remember that Mankiw’s textbook is one of the key instruments for the reproduction of economic knowledge). In plain English, they reveal ignorance and arrogance tied together.

Mankiw knows very little about the logical problems with mainstream distribution theory, and as a result about inequality. But he is willing to indict the views of his students and protesters in the streets nonetheless, and suggests that while he is not ideological (like most economists he says), all his critics are! He should have read Schumpeter and Gunnar Myrdal (a Nobel winner), who claim that ideology is always part of economics. Honesty about one’s political views is central for those authors to maintain objectivity in social sciences.

It is worth remembering, for the sake of objectivity, that Mankiw was the chairman of the chairman of the Council of Economic Advisors during the Bush administration, when tax cuts for the wealthy were the norm, and the housing bubble caused by financial deregulation were not seen as problematic at all. Also, in the name of objectivity, Mankiw does note in his column that he is an advisor to Romney, which has campaigned on the notion that his health care reform was different than Obama’s and that Bush’s tax cuts for the wealthy should be made permanent (maybe we are all ignorant and those views are also supported by non-ideological hard-headed analysis!).

Mankiw should take a page from Paul Samuelson, who admitted (subscription required) both that the neoclassical model might not have all the answers to explain income distribution on the basis of marginal productivity, and later in his life, that the model of comparative advantage that he developed might also not be correct (for a simple explanation of the problems of Samuelson model see here).

Samuelson said that “sometimes a productivity gain in one country can benefit that country alone, while permanently hurting the other country by reducing the gains from trade that are possible between the two countries.” In other words, sometimes critics of free-trade and protesters of globalization might be right! Paraphrasing Keynes, when proven wrong by facts, Samuelson (as much as Keynes) changed his views, but what will Mankiw do?