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      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
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      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
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      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
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      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    I wonder what wealthy philanthrocapitalist or public-private partnership will deliver these to us?

    I assume you're speaking rhetorically, but even so, why wonder? Why be passive? Passivity is the flip side to paternalism: If you're waiting around for someone to tell you what to do, sooner or later someone's going to step up and tell you to do something. You have a PhD in economics, and you have apparently studied no small amount of political science and philosophy. Who better than you is situated to do more than wonder, to actually positively work towards a better world?

    I learned in 2007 that our "democratically elected" government isn't. It's not "democratic" in any sense of the word: It does not directly fulfill the will of the people, nor does it act as any kind of "expert" in making us happier despite our errors and misunderstandings. Instead, it has pretty obviously become an institution devoted to the interests of big capital, especially big financial capital, and its main interaction with the people is to lie, (if you'll pardon the profanity) bullshit, and directly manipulate elections where necessary.

    Why should we leave the structure of society to those who lack the capacity for wonder, to those who have only the burning desire for power and control? Because if people like you sit back and wonder, those are exactly the people who will deliver what you're wondering about.

    I wonder about your separation of consumer surplus from producer surplus.

    It seems to me that producer surplus is what goes to paying the wages that are the income/budget spent to generate consumer surplus (in the next period). Focusing just on consumer surplus makes the analysis more populist sounding, but I think it makes it weaker.

    "separation of consumer surplus from producer surplus"

    This is the boundary between macro- and micro-econonmics, is it not? By what I gleaned from somewhere in Krugman's blog, macro-economics views things at large, where every expenditure is also somebody's income, and everything (e.g. trade-balances vs current-accounts) nets to 0.

    Micro-economics would take more limited views, such as a single class of transaction, buyers and sellers of apple pie, for example. It can help out a few decisions, like "should I get into the apple pie business?", "What might my life be like if I did?, etc.

    I don't see this as polemics, where strong/weak plays a part. This is defining terms and creating intellectual tools. Nice blog article, by the way. DeLong blogged something like it, which I thought I might have understood. I'm pretty sure I understand this one.

    This is awfully simplistic. The problem of resource allocation is anthropological and sociological, and economics as you describe it is merely a poorly grafted side theory with little or no predictive value. Micro-economics has to make a huge number of assumptions in order to work, and every real transaction that any human has ever encountered or is likely to encounter violates so many of those assumptions that micro-economics shines little light on the real world.

    I'm with you on the politics. Power to the people! Go, team!

    But, I am really disappointed in your treatment of the economics. Does no one know how to do this?

    The model of so-called "perfect competition" is a model in which no one acts strategically. That's not possible, and making an impossible ideal into a standard to measure the performance of actual economic arrangements is really not very helpful.

    You might want to follow your own link to Wikipedia on "economic rent". Economic rents can exist, even in perfect competition, if producer surplus exists: it's the same inframarginal excess of income over cost, just expressed in terms of factor (input) incomes. (The doctrine that rents can be competed away is just wrong; while the related "rent-seeking" parable of government as the source of all evil is just right-wing claptrap.)

    Increasing returns to scale are not uncommon, and marginal cost can be falling in the range of market price/output. An actual "monopolist" of a durable good using a production process exhibiting increasing returns to scale or networks or whatever, like Microsoft, will not restrict unit output, at all, relying on price discrimination to profit. The monopolist may, in fact, flood the marketplace with its product.

    There are real problems with winner-take-all contestable markets competition in the information age. But, the ideal of perfect competition is more misleading than enlightening, and the stylized "monopoly" of limited strategic awareness is just silly.

    Here's a link to something I ran across today, that seems relevant:
    (And, I think it is a girl economist, too!)

    DBonar, PS is (in theory) the return to capital (aka profit). It is what is left over after the wage bill has been paid. If it has been artificially enlarged by monopoly or some other market failure that allows price to be set higher than marginal cost or wage rates to be set lower than labor's marginal revenue product, that "enlargement" comes from CS or from workers (I didn't talk about the latter). That (along with wanting to reduce word count) is why restricting the essay to CS is adequate for this brief overview. It can actually get quite complicated because general equilibrium results tend to ripple out through goods and labor markets and affect (usually consumers/workers) in other negative ways.

    Bruce, some profit is good for a variety of reasons. If you can figure out how to sell the inframarginal units at a price that reflects each unit's (lower) marginal cost, you go. But then why would it not be wrong to price discriminate on the consumer side and extract all consumer surplus? Both sides need to "win" a little. I disagree with you about the perfect competition model. It's useful for establishing a standard or ideal, for understanding how deviations from it are likely to affect CS and PS, and for understanding the (unrealistic) conditions that would have to hold to obtain an ideal result. Far better to understand these things than to simply crash ahead tinkering in ways that may ultimately harm millions. (This is not to deny the harm done to millions by blind faith in an ideal that is seldom realized, but that would be another essay.)

    BB, my job is to make people think and to provide an alternative moral narrative that supports sound micro and macro policy in an economy I would like to see remain based on commercial exchange and the productive allocation of capital. If I provide the answers, then people aren't thinking. (And, sometimes, I don't know the right answer, I only know the right question.) :-)

    Good sources on this topic are Joe Stiglitz's textbook "Economics of the Public Sector" Parts 5 and 6 (Norton); and Atkinson/Stiglitz, Lectures on Public Economics (McGraw-Hill), which I think is out of print, but available in most university libraries.

    Thank you all (including Kaleberg and Mel) for your thoughtful comments.

    "BB, my job is to make people think and to provide an alternative moral narrative that supports sound micro and macro policy in an economy I would like to see remain based on commercial exchange and the productive allocation of capital. If I provide the answers, then people aren't thinking. (And, sometimes, I don't know the right answer, I only know the right question.) :-)"

    I think you're defining your job too narrowly. I don't think it's just a matter of spoon-feeding answers to people, it's a matter of exercising moral and political leadership. I'd really like to see a person with your abilities, character and moral sense taking a more active leadership role.

    -- Larry

    like Bruce, I'm not sure it is necessary to go into consumer and producer surplus to make the point about the paternalistic nature of philanthropie. I'm sure I recently (somewhere) made the point that governments should have a voluntary welfare tax account, that people can donate to if they want. If they don't choose that path, doesn't it suggest is all about power?

    You could also have an account for medical research etc.


    Thanks for the reply.

    If we simplify so that the "producer" is just a craftsman or a small shopkeeper, it seems like producer surplus is part of his income. I agree that you can think of his income as just the income from alternative employment and any excess above that as rent on capital (in the form of tools, stock, materials, past training, talent, time, etc.)

    At that point though, it seems pretty symmetric. The trade happens because both sides benefit. And both sides make the world better. Erosion of consumer surplus in one period just seems to be providing higher producer surplus in that period and thus more income for consumption in the next period.

    The point I was trying to get at (very obliquely) is that the issues seem to come up when one person gets either an exceptionally large consumer or producer surplus.

    In any case, I'm not pretending to understand the issue.

    The comments to this entry are closed.

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