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Please begin with an informative title:

In a recent Wall Street Journal Article George Mason University Economics Daniel Klein discusses research he recently conducted with Zogby that purports to show that liberals are "economically unenlightened". Yet the questionairre and its interpretation demonstrate an appalling-if typical-approach to assuming that "free market economics" (or what might be called "orthodox neo-classical theory) gives us "correct" answers in the same way that modern physics gives us "correct" answers. The actual case is nothing of the sort.

I discuss this below. Sorry if the analysis is long and a little technical. But I thought at least some DKos readers might appreciate a bit of real "enlightenment" about the theoretical ignorance that apparently parades as "economics" at George Mason University.


You must enter an Intro for your Diary Entry between 300 and 1150 characters long (that's approximately 50-175 words without any html or formatting markup).

The research was a questionairre that included a set of questions such as the following, with an "incorrect" answer being deemed "unenlightened".

Mandatory licensing of professional services increases the prices of those services (unenlightened answer: disagree). 2) Overall, the standard of living is higher today than it was 30 years ago (unenlightened answer: disagree). 3) Rent control leads to housing shortages (unenlightened answer: disagree). 4) A company with the largest market share is a monopoly (unenlightened answer: agree). 5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree). 6) Free trade leads to unemployment (unenlightened answer: agree). 7) Minimum wage laws raise unemployment (unenlightened answer: disagree).</</blockquote>Since a much higher proportion of self-identified liberals as opposed to conservatives gave the "unenlightened" answer, Klein concluded that at least among people inclined to answer the survey, liberals are much more "unenlightened" than conservatives on economic issues.

It will take a little space, but let's see how "unenlightened" about some basic results of standard economic literature Klein is.

First, Klein starts from the following premise which is a conclusion that holds only for a perfectly competitive market under extremely idealized conditions, and even then only "everything else held equal":

Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.
Let's start with number 1: Does licensing of doctors, lawyers, stock brokers, nurses, etc. really increase the price of services?

Do stop lights on a street slow down traffic or aid the traffic flow? The answer is-it depends. Well placed and well time traffic lights actually help traffic to flow more smoothely with fewer accidents. An excessive number of stop lights that are poorly placed and timed, do in fact slow down traffic.

Let's make an analogy: do sensible regulations on who can and can't offer a medical, legal, etc. service increase the price and availability or decrease it? I would argue (if you take a basic principle of the economic literature on information as established) that under some conditions by taking all the lemons out of the market, you actually make the market function more smoothely, thus in the end, making the service more affordable for the consumer. But wait: couldn't you contract with me to do brain surgery if government didn't license brain surgeons? Yes you could-but the fact is, I wouldn't actually be offering the same service brain surgeons are offering today.

2. Is today's standard of living lower or higher than 30 years ago?

A basic raspberry to Daniel Klein for apparently confusing "Income per capita" with "standard of living". That is the only way this answer can be deemed to have any kind of unambiguous answer. Since real wages for many Americans have stagnated and many households have to work more hours to attain the same basic number of goods, not everyone's "standard of living" has in fact increased. To say something like "the standard of living has increased" means we need a very broad index on standard of living. This is a basic confusion I actually spend time on in intro macro to get across to principles levels students.

3. Do rent controls create housing shortages? I'm actually in "Kleined" (pun deliberate) to give him this one? But in relation to what? Incidentally, raising housing prices doesn't mean that people get the housing they need-it simply means people get the housing they can afford. But again-I do agree with his reasoning here.

4. Market share is in fact a measure of monopoly power. Monopoly and perfect competition are technical terms-neither of which apply to many real world markets. Markets are monopolistic or competitive by degree and a firm with large market share does at least sometimes act like a monopolist. (Note: Klein did not ask "always" and he did not define what he was asking). Microsoft's abuse of market share was in fact a factor (among others) in the anti-trust case against Microsoft.

5. Are third world workers "exploited"? Well, Klein should know that for many reasons "exploited" is a term we economists try to avoid unless we first give a precise definition. Here is a simple test: if two workers have the same level of productivity, producing the same product for the same firm, and the product sells for the same price then most economists would agree, that if one worker's wage is lower than another, we can say-either-one of the workers is exploited or that the other worker is receiving a "rent" or both. Thinking that third world workers in low wage sweatshops are "exploited" is actually pretty reasonable.

Are they "better off" being exploited: well, that brings to mind Joan Robinson's favorite quip: "the only thing worse than the misery of being exploited, is the misery of not being exploited at all."

6. Free trade leads to unemployment? Um, er, Daniel-have you bothered to ever read a freaking textbook and do a straightforward application of the standard trade model? In fact, workers in an industry that was previously protected by tariffs will in fact lose their job-at least in the short run. Will they gain other jobs in "the long run"-maybe-when we are all dead as Keynes suggested in another context. And then only if all kinds of special circumstances apply. But as it stands, the rate of structural unemployment could very well increase in response to free trade.

(all other things held equal free trade tends to lead to higher GDP per capita-but that's not what Klein asked).

7. Do minimum wage laws lead to unemployment? All the standard economic models say they should-but only in a micro sense and only if minimum wages are set well above the prevailing rate. How you answer this question depends on whether you want to answer it "theoretically" (all other things held constant...") or empirically. Thus far, numerous studies have shown that minimum wages laws in the U.S. have not led to increase unemployment.

And if we go farther we have to ask: are real wages set at the "micro" or at the "macro" level. A strong, growing economy leads to higher wages.

Extended (Optional)

Originally posted to Citizen Rat on Thu Jun 10, 2010 at 10:22 AM PDT.

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