When microeconomics is not about shopping

I finished yesterday a 6-day course, with 6 hours per day (with two pauses per session) of online teaching, on Applied Microeconomics. It was physically exhausting but rewarding and fun. It is a graduate course I have been teaching for some years now, and in the recent past I have adapted it for a one week intensive experience in Cali (Colombia). But this time I couldn't go there, so we did it from home. Since it was with a small group of five Colombian students, it turned out to be a great experience for me, and I believe also for the students. Virtual courses, from my short experience, work well either if the group is small or if the material is very good. My undergraduate virtual course on Introductory Economics for political science students was good thanks to the CORE material, and this graduate course worked well because the group was small.The contents of the course have been evolving since I started teaching it more than 10 years ago. Now I concentrate the neoclassical models of consumption and production in the first of six chapters. The second is about welfare economics, the third is an introduction to game theory, the fourth about social choice and political economy, the fifth about organizations (this was new this time), and the sixth about behavioral economics. In exercises and examples in welfare economics and game theory, I also teach them the basic Industrial Organization models. Everything with empirical or overview papers presented by the students themselves. Some of them told me that they didn't expect microeconomics to be this. I think they were positively surprised to see empirical applications, discussions about inequality, organizational failures, bounded rationality or climate change and the pandemic. 

When microeconomics goes beyond supply and demand is really when students can enjoy it and see its relevance for today's human problems and challenges.The students were very active in the discussion linking organizational failures to the literature on multidimensional incentives. They gave very good examples from their experience in Colombia about incentives backfiring. The problem is not that incentives are not effective, but that they may be too effective. The examples they gave about a variety of organizations in their country (including the army) fit very well with the cases discussed in the paper by Garicano and Rayo that they had to read. They made additional contributions to the list of organizational failures of these authors, for example talking about toxic relationships inside organizations, and the difficulties of designing and planning for the very small firms that dominate the Colombian economy. For them, trial and error is of the essence.

Can capitalism be fair?

Case and Deaton write, at the end of their book “Deaths of Despair” (2020), that “Capitalism is an immensely powerful force for progress and for good, but it needs to serve people and not have people serve it”. And that “the fundamental problem is unfairness, that the great wealth at the top is seen as ill-gotten in a system that gives no chance to many. We argue that limiting rent-seeking and reducing plunder will rein in the rich and reduce unfair top incomes without high taxes on income or wealth that is widely seen as fairly earned.”

Capitalism is an economic system characterized according to “The Economy” (CORE Project) by the following specific institutions: markets, private property and firms (where the people who own capital goods make decisions). It follows that the power relationship between people who own capital and workers in the company is a key part of the capitalist economic system and, to the extent that workers are a large majority, one of its main sources of unfair inequality. 

Inequality begins with the position a person occupies in the basic contracts of the economy, for example in the employment relationship or in financial relationships. As these relationships are characterized by the presence of incomplete contracts, where one party (the "principal") has power over another party (the "agent"), and a third party is totally excluded from the contracts, determining whether someone is principal, agent or excluded party, conditions the place that she occupies in the distribution of income and wealth. Not everyone can participate in the ownership of capital because in financial markets a large part of the population is excluded due to a lack of collateral and equity, so that the initial conditions make it very difficult to equalize access to the status of “principal” in the company. 

Although much of the mainstream economics profession has long ceased to think in terms of inequalities based on discrete categories, such as the category of social class, the truth is that such discrete categories (precisely in light of the most modern incomplete contract models), add information to the continuous categories on which conventional measures of inequality are based. According to Bowles in his book Microeconomics (2004), occupying one place or another in the structure of business or financial relationships, not only confers income or wealth, but also confers power, that is, the authority for other people to do what one wants, regardless of their will. Once someone occupies the role of principal or agent in a work or financial relationship, it is not easy to change positions. In theory (and in practice in some cases, which do not alter the general configuration), the same person can be agent in some contracts and principal in others. Working people (although this is not the most common case for the majority of the population) can be shareholders of companies, for example, and business managers can be principals in some financial contracts. However, a growing trend according to Milanovic (2019) is that the same people (the chief executives of large companies) accumulate, especially in some countries, a higher proportion of both earned income and capital income, in which this author has called homoploutia. This sector has a great capacity to accumulate and retain power, and transmit it from generation to generation, generating great persistence in economic inequalities. In the context of the incomplete contract models, this sector does not alter the general approach, since they can be considered people who, despite not being "rentiers", they are people with access to financial markets, who make decisions in the companies, and therefore in the labor relationship they are principals and not agents. For Milanovic himself, the weight of this ultra-rich class of labor and capital does not alter the fact that capitalism as an economic system has remained practically alone in the world. According to the very title of his book, there is capitalism, and nothing else, although there may be varieties of it depending on how it complements the political system (for example, differently in the United States and China). 

This loneliness of capitalism is complemented by the success and universality, according to this author, of the selfish and materialistic attitudes of maximizing individual material well-being, which are easily adapted to the requirements of markets and private property as institutions. A relatively different view is presented by Bowles and Carlin in their article “Shrinking Capitalism”, for whom capitalism is shrinking, in the sense that for a larger proportion of interactions in the modern economy, contracts are incomplete, and create a lot of space to be "completed" with elements such as social norms, intrinsic motivations, community spirit and altruistic cooperation. A synthesis of both points of view could be that although the dominant and almost unique economic system continues to be the capitalist one, in its current conditions it does not conform to the emerging characteristics of human societies. This raises the question of whether it is possible to reform the capitalist economic system, in the direction of greater efficiency and social justice, and continue to respond to the definition.

Case and Deaton in “Deaths of Despair” are optimistic in this regard, and do not believe that it is necessary to flee from the current system, which can improve efficiency and equity (even overcoming the problems they mention of deaths from despair in the United States) by improving the functioning of the education and health systems, even without drastically modifying tax systems. Milanovic seems to coincide, in the sense that he does not see much room for redistributive reforms (except in the need to reinforce inheritance taxes), but he does find room for pre-distributive reforms, related to a better distribution of the property of financial and human capital. Piketty in Capital and Ideology (2019) is the one who goes further in his proposals, to the point that its application would take us out of the definition of a capitalist economic system, by proposing what he calls participatory socialism, based on the participation of labor in property and and in company decisions.

From Nelson Mandela to the QANon Shaman

Many people in Europe are rushing to delete tweets where they were sympathizing with Donald Trump, or even pictures with him. Sophisticated élites saw in him a way to keep workers distracted from lower living standards, as explained in the famous book "Let them Eat tweets." Naive workers saw in him a quick fix to their problems, one of exploiting racial prejudices and promoting wall building. Nationalist bigots who perhaps have left the weapons behind, but not always the rhetoric, in the Basque Country, in Northern Ireland or in the Balkans, saw hope in the restoration of a narrative based on motherlands and identities. Nationalpopulists everywhere had geostrategic reasons to expect that the tacit alliance between Trump and Putin would deliver a world where illiberal democracies (or ethnocracies) might prosper and liberal ones would be destabilized. All these possibilities are not gone, but the publicity for all of them has not been good in the last few days.

Many of these European nationalists or nationalpopulists, like to surround themselves with comparisons with true freedom fighters like Mandela. That is very well explained in the book "Say Nothing" about Northern Ireland. But now, the mirror does not return the image of a liberator, but the image of the QANon Shaman and Donald Trump in his darkest hour.

Many people blame the center-left for the emergence of phenomena like Trump or Brexit. It is true that the center-left has not offered enough hope in the recent decades, and that has created a large highway through wich plutocratic populists can march. But now the center-left has defeated them in the USA, both in the Presidential and in the Senate elections, even overcoming the bias of electoral rules that favor rural areas.

It is time to refocus and learn from the US Democratic Party. Nationalpopulism has been just one more attempt to create dimensions of conflict based on identities, so that the majority of people forget about income and wealth distribution. The problems of the white poor are not the fault of the black poor, and the problems of the British poor are not the fault of the Polish poor, as explained in the book "Trade wars are class wars." There is an article in economics, by economist John E. Roemer, entitled "Why the Poor do not Expropiate the Rich in Democracies". Why not? because the wealthy supply side of politics mobilizes racial, religious or identitarian dimensions of conflict that make it possible for a white poor to vote for a white rich under the belief that the white coalition will make all the white richer. That never happens, and only the white rich benefit.

"Let them eat tweets" or more recent articles, for example by Bonica et al. or Rodrik, say similar things. There are many other reasons why democracy is compatible with increasing inequalities, but the mobilization of identities remains one of the clearest. This mobilization does not bring freedom, it brings madness like the one represented by Trump and the QANon Shaman.