How Do Economists Teach Rise of Trump & Sanders?

The Fiscal Times ^ | May 17, 2016 | Mark Thoma

[expat_panama]

Nobel Prize winning economist Joseph Stiglitz recently highlighted two schools of thought on how income is distributed to different groups of people in the economy. Which school is correct has important implications for our understanding of the forces that have caused the rise in inequality, and for the policies needed to reverse this trend. It also relates to another controversy that has flamed up recently, how economics should be taught in principles of economics courses.

The first school of thought is that inequality is a natural and equitable outcome of competitive market forces. According to this view, which is based upon textbook models of competitive markets, individuals are rewarded according to their contributions to the economic well being of society. Those who contribute the most to the production of the goods and services we all enjoy receive the highest rewards and climb to the top of the income distribution.

Related: The Politics of Income Inequality

For workers, the reward depends upon their human capital, the skills and talents they bring to the marketplace. For capitalists, it depends upon the amount of financial resources they are willing to risk in an attempt to bring new products to market, or improve upon those that already exist. Thus, the study of inequality has traditionally focused on how human and physical capital are distributed in society, and how that distribution changes over time.

This school of thought attributes the rise in inequality to two sources, technological change that has enhanced the ability of skilled workers to contribute to the social good, and globalization that has made it possible to satisfy the needs of larger and larger numbers of people all over the world. Since those at the top of the income distribution are being equitably rewarded for their contributions to society, any attempt by government to intervene and reduce inequality through income redistribution will undercut the incentives the market offers for contributing so much.

For this reason, this school argues that instead of interfering with the efficiency and fundamental equity the market system brings us, what is needed is to elevate the skills of the have-nots through education to improve their human capital, and to ensure that everyone has equal opportunity to reap the rewards the market system has to offer.

CEO Pay vs. S&P 500 vs. Typical Worker Pay | Graphiq

Related: Here’s Why Income Inequality Is Grossly Exaggerated

The second view of inequality, one that is gaining traction, emphasizes market imperfections and the exploitation of power relationships. Adherents to this school of thought believe that market systems have an inherent tendency toward large monopolies, and this tendency has been furthered by technological change, globalization, and economic strategies by incumbent firms that make it hard for new competitors to enter the market.

As monopoly power becomes established, those with economic and political power can capture the political process and prevent the enforcement of antitrust law and regulatory change that could threaten their market dominance. The political power large firms have can also be used to undermine unions destroying any chance workers have to bargain on equal footing for wages. This leads to even higher profits and more inequality.

The solution in this case is for government to get involved rather than step away. The outcome is no longer has the efficiency properties that come with a competitive market system, and the claim that the distribution of income is equitable in the sense of being based upon an individual’s contribution to society rather than the exploitation of economic and political power is lost. As Professor Stiglitz says:

“In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to Internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the ‘pure’ competition depicted in textbooks. … If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. But if markets are based on exploitation, the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.”

Related: Watch Out, Hillary Clinton: A Revolt Is Brewing in the Democratic Party

If the view that we cannot fully explain the evolution of the economy with traditional models is correct, and I believe it is, it has important implications for the recent debate over how economics should be taught. There is much to be said for teaching the traditional model of perfect competition in principles of economics courses. For one, it provides a baseline for measuring how far market imperfections push us away from an efficient and equitable outcome and it provides a goal for policymakers to strive for as they try to implement solutions to these problems. It also provides students with an important framework to think about the costs and benefits of economic choices. For example, if we want to reduce fraud in the financial sector, at what point does the cost of an additional regulator or other preventative measure exceed the benefits?

These courses do spend time looking at the economic consequences of monopolistic completion, oligopolies, and monopolies, though not enough in most cases. But students are left with the impression that these market structures are aberrations from the norm rather than the normal state of affairs. That needs to change. And what is missing altogether in most cases is a discussion of power relationships. Quoting Professor Stiglitz once again, “historically, the oppression of large groups – slaves, women, and minorities of various types – are obvious instances where inequalities are the result of power relationships, not marginal returns.”

If we want students to come away from these courses fully equipped to understand issues such as those that have fueled the rise of Donald Trump and Bernie Sanders, and to be able to evaluate the merits of the solutions they have proposed, discussions of the power relationships that come with departures from pure competition must be a central part of the education they receive.

[expat_panama]

Two things.  One is that the title of this thread mentions Trump & Sanders --mentioned only at the end of the piece-- while the FT title was different.  The thread's title came from the Real Clear Market's link title.  The other thing is that this post is just the text and it doesn't include all kinds of really neat and exotic html stuff --graphics, related articles, lingerie advertising, etc.  Example: CEO Pay Has Grown 90 Times Faster than Typical Worker Pay Since 1978

[Maverick68]

Well, you can explain the rise of Trump (and I guess Sanders) by explaining to people that after a while, it is human nature to get sick and tired of having someone whizz down your leg and tell you it’s raining.

Explain to them that this is the first salvo in a bloodless revolution.

[expat_panama]

Happy Mid-week traders!  Yesterday major stock indexes tanked in rising volume (institutional selling) and this morning's futures point to more of the same for stocks and modest gains for metals.    Blame it on today's reports:

7:00 AM MBA Mortgage Index
10:30 AM Crude Inventories
2:00 PM FOMC Minutes

--or maybe politics:

Trump's Got Fearful Wall Street's Number - Darrell Delamaide, USA Today
Sans Tax Forms, How Rich Is Donald Trump? - John Cassidy, New Yorker
Hillary Wants to Put Tax-Cutting Deregulator in Charge? - Editorial, IBD
The President Is Not 'In Charge of the Economy' - Kevin Williamson, NRO
Growth Rate Is Held Down by Lack of Government - Eduardo Porter, NYT

My take: it's "Regime Change Time", just like w/ the crashes of '00 and '08.

[expat_panama]

...a bloodless revolution.

Huh.  Two of us are optimists...

[yuleeyahoo]

Occam’s Razor. Intricate, complex explanations are supplied by people trying to justify their jobs.

[SAJ]

How?

Very badly.

[Buckeye McFrog]

Only one way they can teach it.

“Everything we have been teaching you for the past four decades is WRONG and is in the process of being rejected by the American People.”

[Jumper]

So do the little college attending socialists voting for Bernie Sanders understand that they will only get educated for jobs in a society they choose to be a part of, and that their pay will be similar to burger flippers, toilet cleaners, etc. It is just that society allocates resources to their college educations, and they are still become servants of the party and cultural revolution?

[buffaloguy]

Growing income inequality is an attribute of economic depressions. It always occurs in that situation. No exceptions.

[mad_as_he$$]

I am betting crude inventories will be higher than expected. Went short CVX and COP yesterday am.

[expat_panama]

Everything we have been teaching you for the past four decades is WRONG

How?  Very badly.

people trying to justify their jobs.

bloodless revolution.

become servants of the party

Sounds like nobody's read the essay, not that I can blame anyone. 

Here's what it says: The original title was "Economic Models Must Account for ‘Who Has the Power’" and that's what got me into it.  The problem is the writer then goes on w/ his desire to "understanding of the forces that have caused the rise in inequality, and for the policies needed to reverse this trend."   That was my first red flag.   He did go on to say there are two major schools of thought on the popularly understood causes of inequality, one being "market imperfections and the exploitation" and the other "technological change that has enhanced the ability of skilled workers to contribute to the social good, and globalization". 

Nowhere is there any desire on anyone's part to face the true cause of income inequality, that people are different --and the only way of making everyone get the same income is for everyone to be dead.  OK, so us folks here know better but we also would do well to understand where this insanity is going and how far it's gotten.

[expat_panama]

Went short CVX and COP

Interesting, yesterday I closed my last stock/etf position and maybe today I'll be putting in orders to sell off my mutual fund shares.

[expat_panama]

Growing income inequality is an attribute of economic depressions.

That idea's no more crazy than most I've been hearing.  Would you say that incomes are more equal now than they were a hundred years ago?  If not than are you saying the U.S. economy has been contracting all that time?

[Craftmore]

Target company stock drops another 6.70 a share today,down to 66.89 a share.They were at 86.00 a share 1 month ago.What is the difference?Oh thats right Target decided transgenders,pedophiles and perverts were more important that 99.7 percent of thier shoppers.Thats a loss of 20.00 a share or a loss of 20 billion dollars.Go Target!

[killermosquito]

The wealthy have decided that it is better to invest in politicians than it is to invest in the economy. The system is totally corrupted.

[killermosquito]

Audited a college philosophy course years ago taught by a friend who has a phd in it. He had the students play a game called “Star Power.” Do a wikipedia search on it and you will see what is happening. Those in power make the rules to keep themselves in power and to benefit those who will give them more power.

[buffaloguy]

No they are not contracting from 100 years ago. The disparity in income was very high beginning in the 1870s and grew particularly quickly in the 1890s and 1930s due to very bad recessions. It has been said that beginning in the 1870s there was an entire generation of men who never had a steady job. A lot of it was due to the massive influx of immigrants during the last half of the 1800s.

Think Andrew Carnegie and the Mellons.

[expat_panama]

Target company stock drops another 6.70

The fall since the Apr. 27 policy announcement sure has been dramatic:

I was all set to tell myself that I know more than the CEOs but then I had to ask myself why didn't I buy TGT shorts back then?  If I really was that smart I could've sunk everything into short sales and cleared big bux by now.  Let's face it, we've all learned something here...

[Diana in Wisconsin]

IMHO, you never go wrong betting on the side of basic Human Nature.

I’ve invested in a ‘vice’ fund for years. Gambling, Booze, Tobacco and things that support the Military/Industrial Complex.

There will always be a war happening somewhere and the LAST things people give up in ANY economic downturn are smokes, booze and lottery tickets.

I know. You probably thought better of me, but it is what it is, LOL! :)

[wita]

Garden Gal from WI makes it big on Wall Street. Grand illusion but at least you could have named the fund so we could sling some more stuff your way.