Philo-of-eco blog: Specialization without Trade (or naked self-interest of ignorant economists)

I may be in a vile mood this week (probably because the decision-theoretical mafia within philosophy does not deem my methodological-historical work on Chicago economics "philosophical"--about which another time.) Anyway, this week I aim my critical fire at the deplorable state of the debate among leading contemporary economists about the philosophic underpinnings of public policy. I will use the Presidential Address (at the Eastern Economics Association) by Gregory Mankiw as exhibit A. It is an instance of specialization without any (openness to intellectual) gains from trade--which provides me with the title of this blog. (In passing I'll call attention to Rawls' deep knowledge of economics.) The ad personam kicker of this week's  entry will be in the final paragraph below where I will suggest that Mankiw's naked financial self-interest may be a further proximate cause behind his superficial theorizing. But first let me show how when he comes to normative theory, he deploys standard economics theory in ideological fashion.

Mankiw (who has a widely read blog) teaches at Harvard; his most famous papers are contributions to so-called growth theory. (I have to admit that I view most of that work as dressed up curve-fitting, but at least it's empirical.) Anyway, his presidential address takes aim at utilitarian justification for wealth transfer in order to advocate a just deserts account.

First, so what's wrong with just deserts (from the point of view economics). I call attention to a non trivial economic fact. (I think the point I am about to make was first made by Mancur Olson, who should have won a Nobel.) A taxi driver, who moves from La Paz, Bolivia, to New York city can (with a little bit of credentialing) without any change in his skills make a lot of extra income as a taxi driver. (An economics professor who moves from Harvard to Karachi experiences the reverse.) This suggests that our actual individual income is a poor proxy for the individual contribution to marginal product. In fact, a lot of social institutions contribute to general productivity. (Note that the point I am making is true irrespective of the further two-fold luck involved in a) our initial endowments; b) the relative distribution of supply/demand of our particular talents. [Not to mention all the distortions in the labor market/tax policies.]) Okay with that in place, let's turn to Mankiw's Presidential address.

He writes, "it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services." Well, yes, this is true, and the theoretical work of "Gerard Debreu and Herbert Scarf" (1963) does allow one to see that "if the freedom to exit a society is taken as axiomatic, then the only permissible allocations of resources are the competitive market equilibria." But as I noted before here, the relationship between Debreu's theorizing and reality is tenuous (see also here). Even if we stipulate -- for the sake of argument -- that our immigrant taxi driver is paid the value of his local marginal product, it's clear that the societal circumstance (maybe due to increased division of labor, widespread elementary school education, well functioning legal/economic institutions, etc) is not of negligible import in the dollar value of his income. So, without taking into account such (rather basic) ECONOMIC FACTS any theory that uses earned income as a proxy for just desert risks becoming a fig-leaf for ideology (and upper-class self-interest). AMAZINGLY, Mankiw, who advocates a just deserts theory, is entirely silent about this inconvenient fact!!!!

Second, somewhat more amazingly, Mankiw ignores entirely the devastating criticism of the Nozickian version of the just desert theory by the NOBEL LAUREATE ECONOMIST, James Buchanan! [Thank you David M. Levy for reminding me.] Buchanan attacks the Lockean-procedural underpinnings of Nozick's account (in doing so, he interestingly compares his own Hobbesian approach with the Rawlsian). In fact, Buchanan's example reminds us that once there was a time that economists and philosophers were really part of a shared exchange. (See here for part of the correspondence between Buchanan and Rawls; forgive me this self-promotion it may be the only time I will be published in same volume as Rawls, who -- as evidenced by his marginalia on economists -- really knew his economics before TJ.)

Mankiw admits disarmingly, "I am not a political philosopher by training, I hope you will forgive me if my occasional philosophical ruminations seem like those of an amateur. If I am right that the issue of redistributive justice will be at the heart of the coming policy debate, it will be hard to leave the topic to the philosophical experts. And in light of the inextricable linkages between philosophy and economics that characterize this topic, I hope it is possible that those experts might learn something from humble economists like me." (Last I checked economic experts don't welcome the critical scrutiny of outsiders!) Good, but it might have been more generous by Mankiw if he had shown any interest in philosophy rather than make fun of trolley-style examples in "undergraduate philosophy courses."

Third, In the article Mankiw does quote Nozick, but he seems to have missed entirely that Nozick is engaging with a philosopher named Rawls. This matters because Mankiw writes, "Perhaps the reason is that a viable alternative to utilitarianism is far from obvious. That is, if we reject utilitarianism as the basis for optimal tax policy, what can economists and other policy analysts put in its place as a normative framework?" You guessed it, Mankiw thinks the ONLY SUCH alternative is just deserts theory! Nowhere in his piece does he recognize the existence of the theories by two famous Harvard professors:  Rawls nor (most amazingly) A. Sen (annother NOBEL LAUREATE IN ECONOMICS!) are permitted to enter into his ruminations.

Okay, so the sad facts are that: i) Mankiw clearly realizes he can get away with this (avoiding engaging with the familiar objections and alternatives even from his own disciplinary past) in front of an economics audience; ii) he is so in the grip of a theoretical outlook that he is unable to recognize the social contribution to the marginal product. [For the sake of argument, I am perfectly happy to allow that the social contribution is the consequence of a lot of individuals.] THE MORALLY DEPLORABLE FACT IS iii) Mankiw has a clear self-interest to promote the just-deserts theory. No doubt the members in the audience  sympathetically entered into the happy circumstances that Mankiw, whose fame relies primarily on the advances publishers were willing to pay for his text-book, is looking after his own bottom line. (As Adam Smith teaches us, our moral sentiments are most easily corrupted by the sight of the rich and wealthy!) But, perhaps, the published version should have come with a financial disclosure--yet (as I noted before here), weirdly, economists keep saying that we should ignore THEIR incentives  when we evaluate their utterances.

 UPDATE (10 feb 2011): http://www.newappsblog.com/2011/02/more-on-mankiw-and-his-rhetoric-of-bluff.html