Thursday, August 14, 2008

The Exclusion of Labor, cont.

Here is the last paragraph of what I posted earlier, plus some text that goes into more detail about the subject. Any suggestions would be appreciated.

Most economists are dismissive of any theory not built on what they consider to be solid micro-foundations -- economists' jargon for this patently unrealistic model. Mainstream economists feel threatened by the suggestion that work, workers, or working conditions could be a legitimate subject of economic inquiry. As a result, any challenges to their theoretical position get treated to a hostile reception.

In one famous case, in 1944 Richard Lester published an article questioning whether labor markets actually operated in the manner that mainstream economics suggested. Lester had extensive experience in industry after having recently served as chair of the Southern Textile Commission of the National War Labor Board. Using government data, as well as surveys of industry leaders, Lester found evidence at odds with the assumptions of mainstream economic theory (Lester 1944). For example, his results suggested that an increase in the minimum wage would have little or no effect on employment, a conclusion that infuriated major defenders of the faith, led by George Stigler, later a leader of the Chicago school of economics and a Nobel laureate (see Prasch 2007).

Exactly a half century later, using an entirely different approach, Alan Krueger of Princeton and David Card of the University of California, Berkeley walked back into the same hornet's nest (Card and Krueger 1994). As might be expected, they too met with hostile criticism from fellow economists, some sponsored by the fast food industry. Card and Krueger were both distinguished economists. In fact, Card had won the John Bates Clark award from the American Economic Association given to the outstanding economist under the age of 40. In the face of the controversy, Card eventually dropped this line of research because of the personal costs of challenging the discipline. He explained:

I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole. [Clement 2006]

Lester and Card did not fail to convince their fellow economists because of errors in their work. Economists either ignored their results or, worse yet, rejected them out of hand because they conflicted with economists cherished beliefs. As Stigler's colleague, Milton Friedman, once wrote: "Nothing is harder than for men to face facts that threaten to undermine strongly held beliefs, to change views arrived at over a long period. And there are no such things as unambiguous facts" (Friedman 1968, p. 14; cited in Diesing 1985, p. 61).

Yet, Chicago economics is famous for rejecting empirical evidence. Dierdre McCloskey, a former Chicago faculty member, recounts how people who used data that called the theory into question would "be met by choruses of "I can't believe it" or "It doesn't make sense." Milton Friedman's own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point" (McCloskey 1985, p. 140).

Melvin Reder, another Chicago faculty member, offered further insight in the way that Chicago refuses to give ground in the face of evidence that calls the micro-foundations into question:

Chicago economists tend strongly to appraise their own research and that of others by a standard that requires [inter alia] that the findings of empirical research be consistent with the implications of standard price theory .... The major objective is to convert non economists to their way of thinking .... However imaginative, answers that violate any maintained hypothesis of the paradigm, are penalized as evincing failure to absorb training. [Reder 1982, pp. 13, 18, and 19]

Economists regard this stubborn resistance to be good science. Predictably, the troubling questions raised by Lester and Card had no effect. Economists' beloved micro-foundations and their faith in market efficiency remained invulnerable -- so much so that economists today rarely even bother to publish research about the core of economic theory. In this environment, economists can continue to use their transaction-based theory without the inconvenience of dealing with work, workers, or working conditions. But by removing work, workers, and working conditions from their theory, economists blind themselves to the kind of inefficiencies that this book shows, especially in Chapter 9.


Fungus the Photo! said...

Is Chicago, home of the Daley machine, not also notorious for intellectual mendacity in the political arena also? (See "neo-con")
When rational observers encounter this defiance of an attempt to depict reality, what do "we" do? Publicizing it is an excellent idea!
We share with others and note the proponents of faith based power positions. The better to avoid them until there is enough strength to supercede them. Intellectually. But then it was all about show anyway. We each choose to believe that we can trust our senses. It is only when we can exchange and test our individual information that we validate it and therefore, au Pascal, ourselves and forging a group identity.
Am I correct?

Eleanor said...

Very interesting. Is economics a science in any way? People who work on superstring theory have the excuse that it isn't possible to test their theory, but economists are standing right in the middle of testable reality.

New Scientist had an editorial two or three issues back saying that standard economic theory (based -- they note -- on 19th century physics) does not work and needs to be junked.

Your book looks to be something I will want to buy.

Michael Perelman said...

Eleanor, can you give the reference for the New Scientist editorial? Thanks.

Bruce Webb said...

"They thought that in publishing our work we were being traitors to the cause of economics as a whole."

This is the sentence that jumped out at me when reading Chris Haye's article Hip Heterodoxy and serves to answer Eleanor's question. 'Sciences' don't have 'causes' to which you can be a 'traitor'. Not outside the Soviet Academies of Science.

It seems to me that the entire Chicago style orthodoxy can be explained as framing the whole issue in Hayekian terms. Failing to support the cause on even the smallest point was to sacrifice freedom for slavery, it puts you on the Road to Serfdom. Which may make your cause noble but hardly qualifies it to be considered a science. And of course if you don't buy into the frame to begin with the whole thing starts moving along the scale from science to voodoo.

degustibus said...

Ptolemy was right, after all!!

Anonymous said...

Wasn't the Chicago school the target for the joke "How does an economist keep from starving -- he assumes cans of food and a can-opener" ?

Robert D Feinman said...

Use a good economics maxim: follow the money.

When people continue to spout stuff that is at variance to reality they usual benefit from doing so. In the case of right wing ideologues (both economists and pundits) they owe their livelihoods to the "vast right wing conspiracy" that funds the think tanks and academic departments that employ them.

Places like Cato, Heritage, Hoover, Manhattan, U Chicago and George Mason all get their funding from the same core group of super wealthy plutocrats: Coors, Scaife, Walton, Mars, etc.

Notice that this breed of economic nonsense hardly exists in Europe where there is no plutocratic class to fund it. Not every economist who spouts conventional thought is in the pay of this bunch, but mediocre professors find it safe to just parrot the dogma. It's easy on the intellect and provides steady employment.

Anonymous said...

is it really just the chicago school?
doesn't the problem trace back
to development of marginalist
theory with its emphasis on
needs while process of
production shoved
aside into the
grimy worker

where tatters of red
and black were