In Support Of The Harvard Students’ Walkout On EC 10.

Written by  //  November 4, 2011  //  National Politics, Uncategorized  //  11 Comments

Yesterday, several students of EC 10, an undergraduate Economics course taught at Harvard University by the famous economist, N. Gregory Mankiw, walked out of class. In their “Open Letter to Gregory Mankiw”, they protested against the implicit bias in his course and how it trains students to think in a way that actually propagates the crisis rather than works to resolve it. I was thrilled. It is high time that atleast someone realises that the undergraduate Economics course (taught anywhere, in fact) tends to present views either completely irrelevant to policy or dangerous for it, particularly in view of crisis and even, development.

In this context, Jeremy Patashnik, student of EC 10 wrote his “In Defense of EC 10.” Patashnik insisted that the basis for the walkout was ill founded. He said that the protestors had completely missed the point of Economics –that it addresses positive rather than normative questions. It is not about “Should there be a minimum wage?” for example but about “What happens when there is a minimum wage?” In that way, Economics is a science. Patashnik however, forgets that it is not the positiveness or the normativity of the questions which is at issue but the choice of questions in the first place. For instance, we ask ‘what happens when there are minimum wage regulations’ and arrive at the conclusion that unemployment can be solved by means of ‘labour market flexibility’. We forget that falling wages may actually worsen cyclical unemployment as spending goes down. Since workers do not accumulate capital, they have a higher propensity to consume and if they are deprived of purchasing power, they stop spending which has further feedback effects on output and employment. This is the Keynesianism which the neoclassical synthesis forgets.

Having sticky prices (like the minimum wage) is in fact the very basis of capitalism. It allows for inelastic price expectations. In case of elastic price expectations, if prices rise, one expects them to rise further and if they fall, people expect them to fall further. There is no peg for prices to be centred on. Therefore, when prices fall, people expect them to fall even more and consume less which is why output doesn’t go up on its own in case of a crisis. It requires government intervention to push it up. It is ofcourse, possible to have a crisis even in case of inelastic price expectations but we will not go into that here.

Another scary thing- and this I recall from Mankiw’s ‘Principles of Economics’ textbook which was in fact written for EC 10 and which I have also read as a part of the Delhi University undergraduate syllabus- is that cash subsidies are better than subsidies that distort prices. In other words, instead of allowing for ration shops which give out food at less than market rates, governments should simply identify the poor and give them cash. That way, the poor have a choice as to whether to purchase non food items or to consume food and thus end up with a higher level of utility. (I haven’t presented this argument very well here. Do note that it has a lovely indifference curves related, formally demonstrated proof.) Mankiw forgets that it is the identification of who is poor and who is not that is the problem. In India, beneficiaries of government schemes are identified with the help of a ‘poverty line’. Currently, the Planning Commission has fixed it as Rs. 32. By Mankiw’s cash subsidies argument, only people who earn less than Rs. 32 a day are eligible for the cash subsidy. In case, one earns Rs. 33, bad luck. Moreover, imagine surviving on Rs. 32 a day! This kind of poverty line has a very dangerous Type II error. It leaves out so many people who survive on next to nothing from attaining very minimal standards of nutrition. If food is cheaper, at least they can attain some benefit- even if they don’t reach the highest indifference curve possible. Therefore, if policy makers took their textbook Economics seriously, they would actually create more destitution. Unfortunately, our Manmohan Singh and our Montek Ahluwalia are very good students of Economics.

Crisis wise, there is also the ‘rational expectations hypothesis’. This says that suppose there is a situation of unemployment. Demand and supply have converged at less than full employment output. There is a fiscal thrust to push up output and employment. Suppliers will then see that prices are expected to rise and increase supply. In case of adaptive expectations, supply will rise slowly in response to price expectations which depend on the prices of the previous year. In case of rational expectations however, rational suppliers will already know the full employment output and the price required for demand and supply to adjust at full employment equilibrium therefore they will adjust price is such a way that there is no crisis at all. Therefore, crisis is only due to a shortfall of rationality. The Ratex guys forget that crisis happens because it is systemic. It is not due to a lack of information. It happens simply because the entire system of finance and real capital is inherently unstable. Even if people are perfectly rational, it is theoretically inevitable for crises to happen. One can’t expect that they will simply sort themselves out in the long run when people become rational.

These are only three factors that I can remember from my own undergraduate Economics courses that do not present the entire story. I’m not saying don’t teach Ratex or the argument for cash subsidies. I am simply saying that do teach alternatives to Ratex that talk of crisis as systemic, teach real life reasons why cash subsidies haven’t become popular as opposed to food subsidies, teach us the shortfalls of not having a minimum wage. Isn’t it funny that when someone says something left wing-ish, she is treated as biased and unobjective while whatever the liberal right says, even if it doesn’t present the entire story, is the epitome of objectivity?

11 Comments on "In Support Of The Harvard Students’ Walkout On EC 10."

  1. Alex November 5, 2011 at 8:25 am ·

    It is funny how ‘principles to economics’ is nothing but principles to neoclassical economics. It is hardly an introduction to economics, the study of poverty and unemployment. The distinction between micro and macro is characteristic of neoclassical economics as well. Moreover, the distinction between positive and normative economics is a good strategy to present economics as a ‘neutral’ subject, which it is’nt.

    Some of my thoughts on these lines: http://www.alexmthomas.com/2011/11/05/the-politics-of-microeconomics/

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