Reading Mankiw in Seattle
A while back Nick Rowe challenged amateur internet econocranks (my word, not Nick’s) like me to actually go read an intro econ textbook. (He was specifically targeting the author of Unlearning Economics — who I, at least, don’t consider to be an econocrank, he’s far better-versed than I am, though Nick might.)
I took him up on the challenge, and am finally writing up my thoughts because I need to reference this from another post.
Figuring I ought to go straight to the belly of the beast, I picked up a used copy of Greg Mankiw’s Principles of Microeconomics. I didn’t read every word — I’ve been poring through various econ textbooks online, plus innumerable papers and blog posts, for years, so I knew a lot of it already. But I did go through it fairly carefully (especially the diagrams), and it had some of the effect that Nick was hoping for. Some of the things that I didn’t think were (sensibly) covered in intro econ, in fact are. And not surprisingly given my autodidact’s typical spotlight (and spotty) pattern of knowledge, I learned quite a few new things.
But still, my overall impression was amazement at what is not covered, and in particular what is not covered right up front.
In place of Mankiw’s nostrums about tradeoffs, opportunity costs, margins, incentives, etc., I would expect to see discussion of the fundamentals that underpin all that:
Value. What in the heck is it? How do we measure it? This was the topic of the opening class in my one accounting class, at the NYU MBA school. Basically: accounting for non-accountants, teaching us to deconstruct balance sheets and income statements into flows of funds. A darned rigorous course, taught by a funny and cranky old guy, formerly on the Federal Accounting Standards Board, with a young assistant prof playing the straight man and the enforcer. That first class was one of the most valuable (?) I’ve ever sat through.
The phrase “theory of value” doesn’t even appear in Mankiw’s text, even though he uses the term “value” constantly, and it’s obviously a term that has some import in economics. Imagine an undergraduate who’s had zero exposure to the ideas of subjective versus objective value, or the centuries of (continuing) discussion and debate on the subject, trying to parse the following sentence, and think critically about what it really means.
…we must convert the marginal product of labor (which is measured in bushels of apples) into the value of the marginal product (which is measured in dollars).
Money. What is it? What’s its value relationship to real goods, and in particular real capital? How is it embodied in financial assets? Where did it come from? (Hint: from credit tallies and for coins, military payments of soldiers, not barter between the butcher and the baker. That’s an armchair-created fairy tale.) The phrases “medium of account” and “medium of exchange” don’t appear in the book. Since economics is all about monetary economies, this seems like a significant omission.
Utility. The most fundamental construct in economics — the demand curve — is derived from utility maps. But Mankiw doesn’t even mention the term until page 447, where it’s discussed as “an alternative way to describe prices and optimization.” Alternative? There’s no discussion of ordinal and cardinal utility, or of the troublesome doctrine of revealed preferences (which 1. is the doctrine that allows economists to avoid talking about utility, 2. constitutes a circular definition, and 3. is never mentioned in the book).
All this gives me a feeling of indoctrination into a self-validating, hermetically sealed body of beliefs floating in space, with no egress outside that bubble, into thinking about the thinking going on therein. There are huge and not-wacky bodies of thinking out there that seriously question what goes on inside, often refuting it on its very own terms, and in the words of its own most eminent practitioners.
Yes, you could argue that I’m asking too much of undergraduates, but I would suggest that you’re asking too little (or the wrong thing) of undergraduate professors.
Is Mankiw teaching his “customers” to understand – the hallmark of the North-American higher-education system, in my opinion, compared to most other countries — or is he teaching them to adopt an undeniably ideological world view (no, neoclassical economics is not purely “positive,” not even close), and to just go obediently through the motions as prescribed in the textbook? In my opinion, he’s doing the latter.
I’m tempted to suggest that this is all true because (neoclassical?) economists don’t have a coherent or non-circular theory of value, and money, and utility. (Neither do I, but I’m working on it!) But saying that would make me sound like an internet econocrank.
Cross-posted at Asymptosis.
Steve: Thanks for doing that.
I wasn’t specifically targeting the author of Unlearning Economics. (Unless my memory has failed, which it might have, I’m pretty sure he had already read some economics texts.)
Mankiw discusses “medium of account” and “medium of exchange” in the macro version of his principles text. (There’s a backstory here: some of us, like me, think that intro micro and intro macro should be taught together, in a full course. But this doesn’t fit the idea that university courses should be sliced and diced into easily digestible one-semester packages. So Mankiw’s original Micro+Macro text, like nearly all the other texts, got split into two halves.)
In the olden days, in economics, there was value theory and monetary theory. Value theory morphed into price theory (micro), and monetary theory morphed into macro (very roughly speaking, because it’s not obvious where long run growth theory belongs). And there’s an old debate about whether the two can really be separated.
If it is true as Nick Rowe states, then I would think that “Intro” needs to be just that. An introduction into the language, definitions and over all general concepts germane to both micro and macro.
Frankly, I have the feeling that the separation of micro and macro has left the public thinking in ways that never allow the 2 to meet. It may be intentional on some within the econ profession to have such a situation for only discussing macro allows pretty much the complete ignorance of that which is most critical and experienced by the masses. Earning a living and what to do with the results.
Dan and Nick:
Thanks for the comments, and Nick for the explanation of the textbook market.
I guess I’ll just say that I would love to take the class that Dan describes in his first para (generally covering the topics I listed), from Nick Rowe! No bloody textbook, just an assemblage of various writings. I’d probably want to push your (presumed?) boundaries, though, on what writings got included… Does Godley/Lavoie get in there? Keen? Do they get any cred from Nick when we read them?
I aks because the conversations tend to go like this (in both directions):
“This makes no sense.”
“You don’t understand.”
“I don’t understand because this makes no sense.”
Here’s my experience. I loaded up my “electives” in college with social sciences so economics was one course. I forget, I believe micro. It was the time of OPEC coming into existence.
The prof (a PhD) took the time to explain why OPEC would not be around over time do to market forces. The evening news was saying and promoting the exact same model. Cartels could not survive in the market over time. Honestly, all I could think was that if what I was being taught in my one intro class was THE solution to the problem as being presented on the national news and this was all that economics had for what the people were experiencing then, we were doomed.
I will give the prof credit though. Using a real company that polluted for years, he explained why it was less expensive over time for the company to not clean up the mess and fight the clean up for years. Specifically a river. The effects of inflation and stuff. So I asked if what he was saying is that the company, knowingly or not understood it was cheaper to kill people than to clean up the mess. He paused and said yes, that was the model’s results. The class actually woke up at that moment in the lecture. They were shocked. I was surprised they were shocked.
Just my antidote of econ education.
I would make one addition to the intro: The history of economic including the development of the Nobel prize, the various governmental policies as a results of economic thought of the time and it’s results, the origins of the 2 primary schools of thought (or any others), it’s influence in society, it’s structure in society (schools, think tanks, government). History.
A true science knows it’s history.
I read an intro text once, just to read the idea of loans, deposits and multipliers. I understood the mechanism fine, the cause though seemed wrong. The multiplier effect is a real response to increased real investment, the multiplier effect is not endogenous to the banking system. wneh the bank invests in a new apple farm, then the other banks get on board with the apple pie manufacturers which then must increase capacity. Works that way in my farming town, ag bankers actually ganging up sometimes when the farmers expand and diversify.
I restate the multiplier model to simplify. Congress and the pres can vote to print up a hundred grand and buy an apple farm. In fact, any private fiat banker can print up money and buy an apple farm. The fiat banker accepts an inflation risk for his fiat business, but gains a potential gain in apple profits. The fiat banker then just prints up whatever cash he needs to get the apple farm operating. No debt, no deposit, no loans.
The multiplier still exists, but it comes thru the operation of the farm, and that multiplier effect is limited by the fiat inflation effect. If the farm is succesful, the fiat banker will make a positive net gain of fiat, a deflation because of the net withdrawal of fiat, apple profits greater than printed money. Since he is the fiat banker, he counters the deflation. He gets a twofer. The apple business expands the whole economy, and thus his fiat business. Plus he gets apple seigniorage.
Here is another, time transformation. The commercial banker is generally confronted with aperiodic and semi-periodic customers which the banker maps to an assumed periodic loan system. Then, behind the scenes bankers trade up and down the curve to make it the spape their theory predicts. The former task is the highest risk, it is the main endogenous act of the loan banker, it is where the money is made. Shaping the curve can be done with an algorithm.
As far as unit of account, what that means is simple: Money, by definition responds only to exogenous events, otherwise it would be deliberately not a unit of account. The fiat banker does have one endogenous avtivity, the actual act of using cash to buy apple. The efficiency of that simple grocery checkout act, that minor dance is the entire business of the fiat banker.
So, banking is about estimating a sequence of aperiodic real events to a periodic smoothing filter, the yield curve. The banker error are mostly over aggregation. The optimal currency zone is one in wich bankers likely see a representative sample of all aperiodic events, it boils down to optimal sampling theory. And in the context of accurately sampling the aperiodic economy is where all the debate lies. For example, what is the sampling error for a monopoly fiat banker? What price do we pay that Ben is six months behind due to information delays.