Wednesday, December 12, 2007 [by Greg "I worked for Dubya" Mankiw]
How do the right and left differ?
The conclusion of today's ec 10 lecture:
In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary. [I replaced his asterisks with "GM," while my comments are labelled "JD."]
JD: first of all, I should note that Mankiw is only talking about one dimension of the political spectrum. I'd define left vs. right in terms of class, with the left siding with the poor and working classes and the right siding with Mankiw's employers. This left vs. right mostly coincides with democracy vs. dictatorship. There's also a centralized vs. decentralized spectrum, which is what Mankiw mostly describes. Finally, there's the tradition vs. modernism spectrum.
GM: The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
JD: Mankiw implicitly assumes that taxes "distort" markets, i.e., that the markets were "perfect" ahead of time. He assumes, for example, that no deadweight loss arises from the business sector. But even in the simplest neoclassical theory, it can do so: monopolies and monopsonies impose deadweight losses.
GM: The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
JD: This might be right, i.e. that the difference is empirically-based. But it should be mentioned that the right also likes to use methodological fiat to rule out the role of an important class of externalities, the pecuniary ones. They'd like to ignore such events as towns being destroyed economically when the major employer shuts down its operations, along with the Keynesian multiplier effect and the like.
GM: The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
JD: This defines the "left" as antitrust liberals. It ignores those of us who want to replace the capitalist monopoly on political power (unless we make a big noise) with real democracy, both in politics and in the economy.
GM: The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
JD: The right's notion of "rationality" is close to tautological: rationality involves people doing what they want to do. Individual preferences are taken for granted and unexplained. A heroin addict is "rational" according to the right-wing economists. Further, "rationality" is totally an individual thing that can be expressed only in markets. This forgets the role of social values, which typically cannot be expressed through markets (no matter how rational they are) but can be expressed via democracy.
GM: The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
JD: Again, this "left" is the liberals. It ignores the left which wants to end the artificial distinction between the state (government) and the "market" and to subordinate both of these to democracy.
GM: There is one last issue that divides the right and the left -- perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.
JD: Is it a "market-based distribution of income"? Not according to the standard economics which Mankiw professes to profess. Standard neoclassical economics starts with the distribution of _assets_. Then the market results reflect that distribution (along with differences in preferences).
At this point, we should bring in non-standard economics: those with the most assets benefit most from the market. This allows them to accumulate more assets, so that they benefit even more from the market.
This kind of snowballing inequality of asset-ownership (and power) can be seen happening during the last 27 or so years of US economic history. This is now being admitted by mainstream economists. See the interview with Frank Levy in the current issue of CHALLENGE.
Jim Devine / "The conventional view serves to protect us from the painful job of thinking." -- John Kenneth Galbraith