AM03 Monopolies

Building on the analysis of Supply and Demand in Chapter 3 of Hill and Myatt’s Anti-Textbook, this lecture constructs a very simple model of monopoly and duopoly, to show that policy implications in these cases differ dramatically from what conventional textbooks teach. The higher level goal is to teach students Meta-Theoretical thinking. This goes beyond the binary logic which lies behind conventional textbooks, which teach student to think in terms of whether theories are true or false, or even instrumental – enabling you to formulate policy and welfare questions. In Meta-Theory, we try to step back and ask questions about who created this theory, in what historical context, which groups did it help, and which did it hurt, and what will the effects be upon us and upon the world, if we decide to affirm these theories for use in our personal lives, and to shape our societies?
The Hill and Myatt Anti-Text is ideally suited to this goal, since it is directly a meta-analysis of the message contained in conventional textbooks, and brings out the implications hidden beneath the surface of the analysis. In particular, the Anti-Text helps us to understand the rhetorical strategy used by conventional textbooks to convince students of theories which are overwhelmingly contradicted by empirical evidence.
BTW, it is worth pausing here to admire the efficiency with which economists succeed in creating such deep brainwashing that mountains of empirical evidence fail to move the faith of the true believers. For Real-World economists, it is very important to study these rhetorical strategies, as exposing this framework is an important component of the De-Programming techniques which are required to reverse the effects of this brainwashing.
Getting back to AM03, the two central META-Questions that we focus on are the following:
1. What are the rhetorical strategies used by conventional textbooks to create the dramatically false and misleading belief that Supply and Demand framework is universally applicable in terms of understanding how markets work?
2. WHY do textbooks want students to believe in Supply and Demand, when this theory is easily proven false?
The methodology used in the lecture is to create a VERY SIMPLE model of a monopoly, one which can be easily understood directly and intuitively by students. We talk about an ice-cream seller in a Public Park, who is the sole vendor of ice-cream. He purchases his ice-cream wholesale at PKR 25, and can sell it for various prices, but the demand will be reduced if he charges higher prices. The rhetorical point in using such models is that conventional textbooks, of necessity, work in IMAGINARY worlds, which cannot be understood intuitively – this is because the theories that they are trying to sell to the students are patently false in any real world context and scenario. That is why, we build on strengths by using REAL WORLD examples to oppose the IMAGINARY scenarios of conventional textbooks. Setting up and examining this example leads to the easy realization of the following key points which we try to convey to the students in this lecture:
1. The main issues facing the monopolist is a large amount of uncertainty and random fluctuations in the demand for ice-cream. The idea of MAXIMIZATION, which requires a KNOWN demand function, simply is not possible for the ice cream vendor. How can he possibly know or learn the demand function, which is dependent on vagaries of the weather, and people? INSTEAD, rule and heuristic based behavior is the only realistic possibility; this possibility is what Agent Based Models implement. (Striking a blow against the MAXIMIZATION idea).
2. Nonetheless, we play along with the conventional textbooks and pretend that somehow the demand function is fixed and known. Then it is clear that the monopolist has the power to set prices, and hence does not have a SUPPLY function. Furthermore, the profit maximization equilibrium does not maximize social welfare. It is clear that REGULATING prices, setting a ceiling price that he can charge, will actually improve social welfare, making more ice-cream available to larger number of customers at cheaper prices, while still allowing fair profits to the monopolist.
The above lessons emerge in an example that is easily understood directly and intuitively by students. Next we focus on the rhetorical aspects.
1. Given that S&D does not hold in monopolies, and more generally in any markets where firm set prices, why is the model given such prominence in textbooks? Before proceeding to apply S&D analysis, should we not ask the question as to whether or not firms have market power, so that we can be sure that there is a supply curve to analyze?
2. The policy implication that setting a price ceiling below observed market equilibrium will lead to shortages is based on S&D and exactly the opposite is true in monopolistic markets. Before dogmatically opposing prices ceilings, should we not try to find out the extent to which perfect competition applies in these markets?
Hill and Myatt also examine the rhetorical strategy used by textbooks to convince students of universal applicability of Supply and Demand. The S&D model is introduced very early, and used throughout the textbook. Problems with and exceptions are mentioned very late in the textbook, and the qualifications required to use S&D never mentioned. Thus the students get the impression that S&D is universally applicable, even though the model works only under conditions of perfect competition. The next lecture AM04 examines a duopoly model in detail and shows that the assumption of full information and zero transactions costs are ESSENTIAL to supply and demand – slight violations, with less than full information, and more than zero transaction costs – lead to complete breakdown of supply and demand. Thus a very fragile special case is presented as the central model for analysis of markets. WHY? Because this is the ONLY case in which markets work well without regulation. IN ALL OTHER CASES, markets require regulation and government interventions improve social welfare. Since the GOAL of textbooks is to prove efficiency of markets and to prove that government interventions are always harmful, they have no choice but to present S&D as the sole model with universal applicability.

For the 90 minute Video-Lecture, together with a 2500 outline and summary, see:

AM03: Monopoly

Advertisements

AM02: Supply & Demand

2nd Lecture (90min) on Advanced Microeconomics at PIDE, (14 Sep 2017). While planning to teach a heterodox micro course, I was faced with the dilemma of choosing a suitable textbook. Interestingly, there are many options available, but I was not happy with most of them. Some were too mathematical for my taste, some made too many concessions to conventional micro while being critical of it, and some were simply not suitable for use as texts. Eventually, I decided to use Rod Hill and Tony Myatt’s: The economics anti-textbook: a critical thinker’s guide to microeconomics. Zed Books Ltd., 2010. I am very pleased with this choice. It provides contact with conventional micro that we need, together with a critique that is easy to understand, and can be used as a basis for construction of good alternative approaches.
I started the course (first lecture was preliminary introduction to methodology and approach) by covering Chapter 3: How Markets Work (In an imaginary world) of the H&M anti-textbook. This chapter attacks the central Supply and Demand model which is at the heart of mainstream micro in a beautiful and elegant way. I am impressed! I have myself written what I thought (and still think) is a very good critique (see The Conflict between General Equilibrium and the Marshallian Cross). I have also seen other critiques (like Sraffa). But H&M pointed out an angle that I had not considered before. They survey conventional textbooks to pick out the main message being conveyed in the S&D model and its policy implications. Then they show that the S&D model is heavily dependent upon the assumptions of perfect competition, which require small price-taking firms, full information and zero transaction costs. All conclusions of S&D and policy implications fail when firms have market power, and the reverse policy ocnclusions can be easily derived. As a RHETORICAL strategy, firms use S&D as a universally applicable model, do not caution students about its limited applicability. It is in fact easy to show, with very simple examples, that even slight violations of the perfectly competitive markets assumptions lead to the complete failure of S&D analysis. HONESTY would at least require textbooks to ASSESS a market to see if it satisfies the assumptions required for validity of S&D. However, because textbooks have a hidden ideological agenda, they fail to mention any restrictions on applicability of S&D. Not only that, but they actually use Oligopolistic markets with large firms to illustrate S&D, which is simply wrong, since S&D does not work in such markets. As a result, students go away from Micro courses with the impression that S&D works in all markets.
WHEN we can easily display these flaws, and especially when we can destroy the S&D model, as H&M effectively do, this is of substantial value in training student to step outside the box of neoclassical orthodoxy. When students realize that they have been duped, it incentivizes them to distrust orthodoxy. This is what the first few lectures in my course attempt to do. At the same time, I try to teach them about viable alternative approaches.

LINK for (1) brief summary, (2) Video Recording (90min) and (3) Longer Outline and Summary (2500 words) of 2nd lecture in Advanced Micro based on Chapter 3 of Hill & Myatt’s Anti-Textbook

https://asadzaman.net/am02-sd-models/

Nudges, individual behavior and neoliberalism

The concept of nudge became popular after the publication of the 2008 book Nudge: Improving decisions about health, wealth, and happiness, written by Cass Sunstein and the most recent Nobel Laureate, Richard Thaler.  According to the authors, nudge refers to “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not” (Thaler and Sunstein, 2008).

In a previous paper, Thaler and Sunstien (2003) highlighted the paternalistic intention and the libertarian tone that overwhelm the concept. As a result, while policymakers shape contexts of individual choice towards optimal policy goals, individuals are free to choose.

Currently, nudges are used to foster social policy goals, such as the so called consumer protection. The aim of the nudge approach is both to test non-coercive alternatives to traditional regulation and to enhance cooperation between the public and the private sector.  Indeed, after 2008, a Behavioural Insights Team (BIT) was created in the UK and in many others countries – like Australia, Canada, the Netherlands, Germany, U.S. and Qatar. Since 2010, the Behavioural Insights Team (BIT) in the UK has been exploring and testing policy options by means of randomised controlled trials (RCTs). Taking into account the American experience, the Obama’s administration stimulated the introduction of nudges in new regulations to generate welfare with cost effectiveness.

Considering this background, the relevant question is: which are the reasons that explain the increasing acceptance of the nudge approach to public policy?

First, the use of nudges in public policy seems to be associated to the broader processes of deregulation and privatization in the context of financialization.

Second, the focus on individual behaviour is consistent with a neoliberal agenda where the new approach to public policy enhances the illusion of free individual choice. In this respect, Ramsey (2012) highlights the real burden on individuals that actually result from labor market flexibility and increasing indebtedness. In his own words: “Deregulation and privatisation often imposed greater choices on individuals (e.g. pensions). Forced to make choices, individuals were invited to regulate themselves according to particular norms of behaviour. Thus in consumer finance markets individuals must learn the appropriate norms of credit and savings behaviour and become financially literate. More recently insights from behavioural economics have been harnessed to ‘nudge’ individuals to change their behaviour”

Third, behind the partnerships between the public and the private sectors that aim at developing new forms of non-coercive regulations, there is, in truth, a set of economic and political interrelations that shape the financialization of corporate strategies in sectors that used to be related to public services. For example, in relation to the health sector, Maryon-Davis (2016) addresses: “Today’s most liberal governments tend to resist calls for regulatory approaches to health behaviour. They are averse to regulating industries such as the tobacco, alcohol and food industries for fear of interfering with companies’ rights to sell their legal products and their legal obligation to shareholders to maximise profits. They tend to be even more reluctant to pass laws directly curtailing the personal freedoms and behaviour of individuals.”

Following the nudge approach, the responsibility for public welfare is shifted to individuals. In spite of encouraging active civic engagement, this approach to public policies seems to neglect the social constraints that restrain individual autonomy. Finally, it is worth noting that, while putting emphasis on individual behaviors and choices, the nudge approach dismisses the global increasing economic, social and political challenges at national, state and local levels.

 

References

Goodwin, T. (2012) Why we should reject ‘nudge’. Politics, 32(2), pp. 85-92.

Maryon-Davis, A. (2016) Government legislation and the restriction of personal freedom. In F. Spotswood (Ed.) Beyond behaviour change: Key issues, interdisciplinary approaches and future directions. UK: University of Bristol Policy Press.

OECD (2015) OECD Regulatory Policy Outlook 2015. Geneve.

Ramsay, I. (2012) Consumer law and policy: Text and materials on regulating consumer markets. Bloomsbury Publishing.

Thaler, R. H., and Sunstein, C. R. (2008) Nudge: Improving decisions about health, wealth, and happiness. U.S.:Yale University Press.

Thaler, R. H., & Sunstein, C. R. (2003a). Libertarian paternalism. The American Economic Review, 93(2), pp.175-179.

 

Microeconomics: An Islamic Approach

At the heart of modern economic theory is the micro-economic model of homo economicus, who is cold, calculating and callous. This picture of humans as heartless rational robots is what leads to “Poisoning the Well: How Economic Theory damages our moral imagination” (Julie Nelson). I have provided a thorough critique of neoclassical utility theory in my paper:  The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,” International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414. However, as Thomas Kuhn noted, paradigms cannot be changed by critiques; they can only be changed by providing an alternative paradigm. Thus to oppose neoclassical utility theory, we need an alternative model for human behavior. For western theorists, a natural alternative is the secular humanist model, which allows for a wide range of cognitive and emotive functions not captured in economics. For my purposes, Islam provide a more relevant model of human beings as having spiritual, emotional and rational dimensions. This model speaks directly to my audience. (see also “Spirituality and Development“)

It is also true that, regardless of how we try, it is impossible to do economics without notions of morality, justice, equity and fair-play. Currently economics pretends to be positive, which means that it sneaks in very questionable (indeed, poisonous) value judgments (like that of Gauthier) into the framework, without explicit discussion. I have explained how the apparently objective concept of scarcity is actually built upon hidden foundations of three major value judgments about exogeneity of tastes, sacredness of property rights, and the idea that (unobservable) human welfare directly corresponds to  (observable) human choice behavior:; see  the normative foundations of scarcity.real-world economics review, issue no. 61. 22. Again to oppose neoclassical micro, we must introduce an alternative ethical and moral framework. Here again it suits my purpose and my audience to use an Islamic framework for this purpose.

Below, I provide a link to a summary of the first lecture I gave, in a unique course on Microeconomics. Unlike Western epistemology which takes all knowledge as useful, Islam differentiates between useful and harmful knowledge. I am teaching the students that conventional micro is “Harmful” knowledge, which damages our natural tendencies for compassion and kindness, and teaches us to be selfish. It teaches us to accept poverty, misery, injustice, and exploitation as natural outcomes of an ideal economic system. The link below provides (1) a very brief summary of the lecture, (2) a link to the 91min video of the actual lecture, and (3) a more detailed 2500 word outline of the lecture, for people who dont have time to watch/listen to the 90 minute lecture.

https://asadzaman.net/am01-introduction/

 

 

 

 

 

Engaging in the I Economic Philosophy WEA Conference

The WEA Online Conferences, designed by Edward Fullbrook and Grazia Ietto-Gillies, makes full use of the digital technologies in the pursuit of the commitments included in the World Economics Association Manifesto: plurality, reality and relevance, diversity, openness and ethical conduct.

The current WEA Conference Economic Philosophy: Complexities in Economics, is being led by Prof. John B. Davis and Prof. Wade Hands. There is considerable interest in recent economics in the idea of complexity. However, there are also many different ideas about what complexity involves, making the subject of complexity itself a complex matter!

Thus the plural form – complexities in economics – is purposefully chosen in order to accommodate the following issues in this inaugural conference on Economic Philosophy:

• the diversity of accounts and conceptions of complexity itself
• how the nature and content of economics is complex
• the complex history of economics
• different approaches to introducing complexity into economics
• the complex relation between the sociology of economics and its content
• the complexity of economic philosophy as an interdisciplinary subject
• the complex interplay between normative and descriptive pluralism

The WEA Online Conferences seek to also engage readers and commentators all around the world considering: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies; (d) the increasing relevance of .the adoption and use of online discussion forums.

Students, academics and professionals who are interested in Economics & Philosophy can read the Key-note papers of Peter Söderbaum and Robert Delorme in addition to other interesting contributions organized in the following Conference Sessions:

1. Contributions from the History of Economics
2. Complexity and Agency
3. Changing Economics
4. Methodological Dimension

To see how the Discussion Forum works, click here. 

The Discussion Forum closes on November 30th. During this time, we cordially invite you to visit the conference’s website, where you can read and download the conference papers, leave comments, and engage in discussion.

Please first Register to this OPEN ACCESS Conference in order to get your e-certificate!

We are looking forward to receiving your comments.

 

The Institutional Approach to Labor Economics

The economist John R. Commons is considered one of the founding fathers of institutional economics. He played a leading role in the developing of the labor economics field by establishing some core principles in his book Institutional Economics: Its Place in Political Economy (1934). Besides, as Kenneth Boulding (1957) stated, Commons’ ideas as a social reformer were very influential in shaping the New Deal and the American labor legislation and social security toward a welfare state.

It is worth noting that some generations of institutionalists in labor economics can be identified since then (Champlin and Knoedler, 2004). After the first generation of Commons and the Wisconsin School, the second generation emerged in the 1950s and included those economists, such as John Dunlop and Neil Chamberlain, who rejected standard economic textbooks and emphasized the role of institutional rules in structuring labor markets and industrial relations. Afterwards, the third generation focused on structural unemployment (e.g., Charles Killignsworth), segmented labor markets (e.g., Michael Piore). This generation also included post-Keynesian economists, such as Eillen Appelbaum.  From 1980 to the present, the fourth generation has been broadened in order to include contiguous fields and new methods of research. Institutionalism has been broadened further to include the new perspective of Ronald Coase and Oliver Williamson that has informed research and model building based on the concept of transaction cost.

Despite de differences between generations, which are the elements that explain the institutionalist labor approach?

• The economic needs are culturally and historically situated.
• The rules of economic behavior do not derived from universal laws of nature by are culturally, legally and socially situated.
• Markets, as legal and cultural arrangements, are characterized by conflict, power relations and inequality.
• Governments are considered major players within the markets.

Indeed, the theoretical construct in labor economics of an institutional nature considers that:

1. The microeconomic neoclassical model of demand and supply is misleading as an explanatory device for the study of employment, wages and labor outcomes.
2. The labor market is not self-equilibrating.
3. Involuntary employment, interindustry and interfirm wage differentials, besides racial and gender patterns of employment are relevant features of the labor markets in the real-world.
4. The behavioral models of human agent should consider imperfect competition, theories of market organization and structure, legal rules and social norms.
5. The study of the labor markets should privilege both realism in economics and a multidisciplinary, social science foundation.
6. The commitment on a normative level to welfare criteria should include ethical goals.

Considering the relevance of this topic in economics education, students should be aware of the differences bweteeen institutionalist and neoclassical economists. Neoclassical and institutional economics are not just labels, but represent different ways of conceptualizing economics and shaping economic policies.  

 

References

Champlin, D.P. and Knoedler, J. T. (2004) The institutionalist Tradition in Labor Economis. New York and London: M.E. Sharpe.

Boulding, K. (1957).  A look at Institutionalism. American Economic Review. 47:1-12.

 

On Hayek and Digital Currencies

In the book Denationalisation of Money- the Argument Refined (1976), Hayek proposed the abolition of the government’s monopoly over the issue of fiat money in order to prevent price instability. In fact, his defense of a complete privatization of money supply stemmed from his disappointment with central banks’ management, which, in his opinion, had been highly influenced by politics. Thus, the ultimate objective of the denationalisation of money advocated by Hayek was related to avoid political interference on monetary policy.

Therefore, the denationalisation of money would be achieved by the complete abolition of the government monopoly over the issue of fiat money.  In the framework of a free market monetary regime, only those currencies that have a stable purchasing power would survive.  The basic idea is that the possibility of banks issuing different currencies would open the way to market competition. Banks could issue non-interest bearing certificates and deposit accounts on the basis of their own distinct registered trade mark and the currencies of different banks would be traded at variable exchange rates. This proposal would leave the way open for a comprehensive privatisation of the supply of money.

Hayek underlined that the main advantage of the free market competitive order is that prices will convey to the acting individuals the relevant information to make decisions to adjust their activities in face of the competition of currencies. He highlighted  the uses of money that would chiefly affect the choice among available kinds of currencies: i)  as ash purchases of commodities and services, ii)  as reserves for future needs; iii) as deferred payments, and iv) as unit of account.   In his opinion, these uses are consequences of the basic function of money as a medium of exchange and  the stability of the value of a currency as unit of account is the most desirable of all uses (Hayek, 1976: 67).

Competition and profit maximisation would lead to market equilibrium where only those banks that pay a competitive return on liabilities to their clients could survive. Since currency corresponds to non-interest-bearing certificates, the crucial requirement is the maintenance of the value of the currency.  Under Hayek’s theoretical framework, the market forces would determine the relative values of the different competing currencies. In other words, the exchange rates between the competing currencies would float freely. So, in equilibrium, only currencies guaranteeing a stable purchasing power would exist. People would not want to hold on to the currency of an issuer that was expected to depreciate relative to one that was expected to hold its value in terms of purchasing power over goods and services. The marginal costs of producing and issuing a currency (notes and coin) are rather low (close to zero) and the nominal rate of interest would be driven (close) to zero. Banks that failed to build up stability for the value of their currencies would lose customers and be driven out of financial business.

After reading this proposal, the question that arises is: are current digital currencies bringing to reality Hayek’s ideas?

In the last ten years, mainly aftyer the 2008 global crisis, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the intense growth of the startups called fintechs, especially since 2010, has revealed a new articulation between finance and technology. As a result of the advance of  new non-bank competitors (fintechs), big banks have begun to establish collaborative partnerships with selected fintechs in order to produce new technological solutions in the areas of payment systems, insurance, financial consultancy and management, besides digital currencies.

In this digital environment, new technologies – such as advanced analytics, blockchains and big data, in addition to the use of robotics, artificial intelligence, besides new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services that could challenge current central banks’ patterns of policy and regulation.

 

References

HAYEK, F. A. von (1990 [1976]) Denationalisation of Money: The Argument Refined, 3^rd. edition, London: Institute of Economic Affairs.