Friday, September 25, 2020

Can Capitalism be "Alone" and "Shrinking" at the same time?

The title of the last book written by Branko Milanovic is “Capitalism, Alone” (I interviewed him about it for the magazine Política & Prosa). Samuel Bowles and Wendy Carlin wrote an article with the title“Shrinking Capitalism,” more or less at the same time that the book was published, just before the current COVID-19 pandemic, and then they updated it in a shorter version for Vox-CEPR. These are three authors that I know, admire and respect. But can capitalism be “alone” in the world today, as Milanovic argues, and at the same time be "shrinking," as Bowles and Carlin say? I find this debate interesting, these days that some of us are starting new graduate or undergraduate courses on introductory economics, public economics or micro. 

I have to assume that they wrote their pieces separately and independently. “Capitalism Alone” was written before the articles about“Shrinking Capitalism”, so the book could not anticípate the arguments of the articles. And the articles do not mention the book. The three authors share an interdisciplinary approach to the economy, and a concern for a fair distribution of income, wealth and power. They know marxism and neoclassical economics, as well as more pluralistic and recent approaches. They share a concern for the renewal of the discipline of Economics as well.

I checked whether the different perspectives on capitalism are based on different definitions. Bowles and Carlin say that “a defining feature of  capitalism is that work produced using privately owned capital goods is performed under the control of an owner or manager in return for wages, producing goods to be sold for profit”. Milanovic characterizes capitalism in his book as following the principles of “production organized for profit using legally free wage labor and mostly privately owned capital, with decentralized coordination”. The definitions thus are very similar. 

Bowles and Carlin emphasize the role played by different mechanisms of resource allocation, and how these relate to different paradigms and narratives in economics. They argue that today with COVID-19 and climate change, as well as in the past with the Great Depression and the Second World War, a new paradigm in economics is needed. The growing importance of the knowledge economy and the care sectors (this is the "positive" side of their argument), makes it very difficult to mobilize resources appealing only to the material incentives typically associated with the market system. Although the pandemic will move ideas and policies toward a bigger role for government intervention in the one-dimensional continuum between state and market, a third pole is needed to open up new possibilities to complement incomplete markets, so that the intrinsic motivations and social norms of communities and civil societies can be mobilized. The old preference neutrality of the economics profession should be replaced in this context by an active promotion of cooperative values (this is the "normative" side of their argument), something that markets and governments alone cannot do.

Milanovic takes a more macro and global approach, thinking more in terms of socio-economic systems than in terms of mechanisms of resource allocation. As compared to 40 years ago, the capitalist system does not have rivals because communism has basically been eliminated, except for some marginal and uninfluential corners. Although the diversity of capitalisms goes probably, as a review in the New York Review of Books has argued, beyond the dichotomy between liberal and political capitalism (US vs China models) that Milanovic proposes, there is little doubt  that the diversity of models has been reduced by the expansion of markets and the profit motive. If anything, even the Western type of capitalism is becoming more similar to the Chinese type, with the expansion of authoritarianism and global corruption. Although in "Capitalism, Alone" the positive side dominates over the prescriptive side, there are some policy recommendations (focus more on pre-distribution rather than re-distribution) and one can see in Milanovic a dislike for some features of capitalism, such as the commodification of household activities and other examples of overreach of the profit motive. So probably Milanovic would agree with Bowles and Carlin at least on some normative aspects.

If a synthesis is possible, I would say that capitalism has defeated other socio-economic systems, such as communism (although it has not always been this way), but its triumph has been accompanied by some dysfunctions that make it, in its real current versions, hardly suited to deal with many of our local or global problems. To tackle the pressing issues of our time, capitalism should at least make room for cooperative social norms and a new narrative in economics.

Saturday, September 12, 2020

The Brahmin Left hypothesis

In a 2018 working paper, and in his book Capital and Ideology, Thomas Piketty uses the concept of the Brahmin Left to refer to the decline of the vote for the left among the voters with less formal education, and the rise of the vote for the left or center-left among the voters of the educational élite. The concept has been very successful, even before the article being published in a major refereed academic journal, reaching the pages of The Economist (last issue) in a Charlemagne column on “the last of the center-lefties,” which questions implicitly, though, that the concept applies to the surviving center left parties of Southern Europe and Scandinavia.

In the three great democracies closely analyzed by Piketty, namely France, the United States and the United Kingdom (extended to other countries, such as Israel, in more recent research), during much of the 20th century a political system that fairly closely followed a logic of social classes, gave rise to redistributive policies, mainly the result of the periods of left or center-left governments. The majority of voters with low income and education levels voted for left-wing parties. However, these redistributive policies have suffered a brake in recent decades, coinciding with the conversion of leftist parties into those preferred by educational elites.

The relationship between the two phenomena suggested by this coincidence, however, is only  mentioned as a conjecture by Piketty, since he does not present a detailed study by which the evolution over time and by countries of the change in the preferences of educational elites, and the brake on redistributive policies have advanced at the same pace, nor that a clear causal link can be established between them.

The theoretical model he presents, in line with other works on the existence of multiple dimensions in political dynamics, offers plausible arguments, similar to those presented by other authors such as John E. Roemer, in the sense that the redistributive dimension may not prevail at any given time.

It could be that the reversal of the higher educated voter pattern of behavior reflected the access of broad sections of the population to education (a phenomenon recognized by Piketty), or at least the fact that education stopped being tremendously elitist. Although in the empirical work the social origin of parents and grandparents is controlled for and the change in educational elites persists, this only means that for two voters with parents and grandparents of the same social level, the one who has accessed a higher level of education will tend to vote more to the left. But it could be that the interest of this phenomenon is not that education makes one a member of an elite that the poor perceive as increasingly distant, but it could also be plausible that a person of humble origin with a better educational level is more difficult to convince with populist and identity demagoguery. Piketty's empirical work does not distinguish between these two alternative hypotheses. The conquest of the lower educational classes by national-populists, to the detriment of the left,  is not universal, as Piketty himself in his book shows that some national-populist movements, such as the one in Catalonia, can obtain most of their votes from educational elites and upper-middle classes.

The data confirm that the influence of income has been reduced but not eliminated (except in 2017 in France because it places Macron on the left, and in 2016 in the presidential elections in the United States); on the other hand, the results of the reversal of the vote for education are much clearer. Those with less income and especially those with less wealth have not clearly come to vote for the right, although they do less for the left. It is true that the sectors with a higher education level now vote more for the left and less for the right than before, although the majority of historically discriminated sectors such as women and non-dominant ethnic groups also vote for the left.

The theoretical part and the empirical part of Piketty's work are of great interest separately but are only loosely related. The reasons why policies that emerge from democratic processes have lost some of their redistributive momentum (although this has been the case to different degrees in different countries) are various. Some may be related to globalization and technological change, others may be related to expectations of future improvement and potential to benefit from inequalities, or the growing weight of money in politics, or the weight of non-distributive dimensions (which are strategically used or introduced by the upper classes, in a conscious way or by trial and error). Piketty's work, which is part of the efforts made by the social sciences to process phenomena that are taking place in the present and on which we lack some perspective, presenting very interesting empirical findings, does not show that the parties of the left or the center-left are captured by unconcerned elites, although it does not allow us to rule it out either. A video like the one showing a conversation between Barack Obama and Kamala Harris, where the former complains about the scarcity of running treadmills in rural America, would be an example of a key member of the globalized center-left élite not speaking exactly the language of common people.

There is little doubt that the left is under big difficulties in those places where identity has conquered the political agenda, with Ireland and Israel being two clear examples. As the allure of identity increases, an existential question for progressives is how to stop this process. The left continues to have its fundamental hallmark in justice (not only with regard to income and wealth) and redistribution. Its future lies in fighting to be effective in correcting injustices, and this probably requires an agenda that facilitates redistributive policies at the relevant geographical dimension in a globalized capitalism.

Friday, September 11, 2020

Public Economics in times of COVID-19

Next week I start a new edition of a graduate course on Public Economics that I have been teaching in the last few years. It is a 10 session (2 hours per session) course in the Master of Economics and Business Administration (MEBA) of the Autonomous University of Barcelona. This is a training (not research) 1 year Master’s program with students coming from all over the world with a diversity of backgrounds. Although this time we’ll have less students than usual due to the difficult travel conditions and fears, it seems there are enough students to start again, using a classroom big enough to keep social distance (or using virtual tools if the pandemic gets worse again).

The experience of the pandemic has made me think about adapting the content and the methodology of the course to what we are learning in the present times.

The course is structured around three blocks: welfare economics, social choice and behavioral economics. In the first part, the more traditional one, we discuss the role of different mechanisms of resource allocation, the two welfare theorems and related results such as the Coase theorem and the theory of the second best. The second part covers the main tools and models of political economy and why when markets are imperfect, we cannot just hope that governments will perfectly fix problems. (These two parts sound very theoretical, but we discuss empirical applications and policy issues related to these theories).The third part introduces students to the relevance of psychological issues in the economic analysis of public policies.

I will start this time by showing students the graphs in the article by Bowles and Carlin about market, state and communities, and their relevance in the current pandemic. In political economy, we’ll reflect about how populism changes the assumptions (or not) of the median voter theorem and how the pandemic may affect the interaction between politics and economics. In the behavioral part, I will try to discuss how the article by Raj Chetty in the American Economic Review on a pragmatic approach to public policies (combining traditional tools and behavioral tools) can be adapted to COVID-19 debates. 

Beyond the Chetty article, I will probably keep the article by Svensson on Eight Questions about Corruption in the Journal of Economic Perspectives, and the Nobel prize lecture by Elinor Ostrom, but I will introduce the article by Herrmann et al. on Public Good experiments (and ask students to replicate the results and do related experiments following one of the empirical projects in CORE), and the debate about Randomized Control Trials between Banerjee/Duflo and Deaton.

In terms of methodology, I will try to use as many of the technological tools I have access to for example through Moodle or Teams, in order to create debates, chats, have online meetings and tutorials. My concern here is that these tools will be used only by the most enthusiastic students, so I will think of strategies to have these more enthusiastic students helping me to involve the others. 

Ideas are very welcome.

Friday, September 4, 2020

Should you think like an economist?

In some introductory economics textbooks there is a section called "Thinking like an economist." There is even a podcast with this title. Probably a lot of what goes below this title is very interesting. But sending the message that students, or the public in general, should think like an economist (as if economists had a special, and good, way of thinking), is something I find hard to agree with.

In a recent talk and in her last book with Banerjee, Esther Duflo pointed out that the profession of economist is dominated by white men. In the context of the black lives matter movement, this has facilitated the knowledge of examples of discrimination and racism in the profession. Some have even talked about a culture of abuse in some academic or institutional environments. Of course, not all institutions or individual economists are racist or abusive, but there are serious doubts that the "representative economist" is an exemplary thinking person.

In questionnaires and experiments, subjects trained as economists tend to be more selfish and less altruist than average subjects. Compared to other academic disciplines, economists are more insular and self-confident, and less prone to cooperate with professionals from other scientific domains. There are some exceptions to this, like the CORE project, but the fact that this project is causing an impact and is sold as something new, shows that the profession is dominated by the opposite trend. 

As Duflo argues in the above mentioned talk, one reason why economists have almost as bad a reputation as politicians is that they are very bad at making predicitons, as specialist Philip Tetlock explains in his work. That is because they think too much as hedgehogs and not enough as foxes. Also, economists tend to overrate financial incentives as opposed to intrinsic motivation, which dominates in communities that are good at overcoming free-riding problems. To alleviate such social dilemmas, one perhaps should think less like the average economist and more like many people who are not economists, but who think like the cooperative species that we are.

Economists should aspire to be just good scientists, and be open to the influence of a variety of disciplines, including humanistic ones. Once a question is posed or a hypothesis is formulated, the methods should be those of the scientific method. In the selection of topics, there will be different approaches, different ways to think. There are good and bad economists, honest and dishonest ones, left wing and right wing, nationalists and cosmopolitans. Think like an economist? Which one?