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Monthly Archives: December 2011

GRAY MATTER

The Dismal Education

By YORAM BAUMAN
Published: December 16, 2011

Chi Birmingham

THE stereotypes about economists are well known: that we’re selfish Grinches; that we don’t read human interest stories because they don’t interest us; that the only reason we don’t sell our children is that we think they’ll be worth more later.

But are the stereotypes true? And if so is the cause nature or nurture? In other words, are selfish people disproportionately likely to become economists? Or is there something about being an economist (or being on the receiving end of economics education) that makes people selfish?

Academic research suggests that there’s a good deal of truth to the stereotype. Many studies have looked at how economists behave in what are called public goods situations. A key feature of these situations is that you can benefit from public goods even if you don’t contribute to them. You can watch PBS without making a donation; you can enjoy clean air even if you drive a car that pollutes. Such goods, however, give rise to the so-called free-rider problem: acting selfishly makes sense for each individual (why sacrifice if you don’t have to?) but as more and more people choose to act selfishly, the good disappears and everyone loses.

Public goods run counter to Adam Smith’s “invisible hand” theory in that self-interested behavior by individuals does not, as the theory would have it, lead to good outcomes for society as a whole. These situations flummox just about everybody — look at all the trouble that nations and individuals are having in dealing with climate change — but economists and economics students appear to be especially likely to free-ride and act in ways that are “anti-social” rather than “pro-social.”

My recent research with the economist Elaina Rose, published in August in the Journal of Economic Behavior and Organization, has looked at a real-life public goods situation faced by students at the University of Washington. During our study period (1999 to 2002), when students went online to register for classes each quarter, they were asked if they wanted to donate $3 to support WashPIRG, a left-leaning activist group. Students were also asked if they wanted to donate $3 to Affordable Tuition Now (ATN), a group that lobbied for “sensible tuition rates, quality financial aid and adequate funding.”

You may question whether these groups actually serve the common good, but that’s mostly beside the point. Regardless of the groups’ actual social value, a purely self-interested individual would choose to free-ride rather than contribute; after all, a single $3 donation is not going to make a noticeable difference in tuition rates.

Our data showed that each group received donations from about 10 percent of the students each quarter. Although students remained anonymous, we could look at all of the 8,743 members of our data set and determine what their majors were, when they took economics classes (if at all) and whether or not they donated to ATN or WashPIRG during each quarter of our study period.

In line with previous research, what we found supported the Grinch stereotype. About 5 percent of economics majors donated to WashPIRG in a given quarter, compared with 8 percent for other arts and sciences majors. A similar divide — 10 percent versus almost 15 percent — occurred with respect to donations to ATN.

We also found evidence that the giving behavior of students who became economics majors was driven by nature, not nurture: taking economics classes did not have a significant negative effect on later giving by economics majors.

But taking economics classes did have a significant negative effect on later giving by students who did not become economics majors. One interpretation of these results is that students who were not economics majors suffered a “loss of innocence” after taking an economics class, presumably because of exposure to certain ideas (like the invisible hand) or certain people (like economics teachers).

In contrast, students who became economics majors did not suffer a loss of innocence. This may be because they lost their innocence in high school — other research suggests that pre-university exposure to economics reduces giving — or perhaps even because economics majors were “born guilty.”

Our research suggests that economics education could do a better job of providing balance. Learning about the shortcomings as well as the successes of free markets is at the heart of any good economics education, and students — especially those who are not destined to major in the field — deserve to hear both sides of the story.

Yoram Bauman, a co-author of “The Cartoon Introduction to Economics,” is an environmental economist at the University of Washington.

http://www.nytimes.com/2011/12/18/opinion/sunday/economists-are-grinches.html

THE UNBOUND ECONOMY

Is Modern Capitalism Sustainable?

2011-12-02

Is Modern Capitalism Sustainable?

CAMBRIDGE – I am often asked if the recent global financial crisis marks the beginning of the end of modern capitalism. It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism.

Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability. China’s  Darwinian capitalism, with its fierce competition among export firms, a weak social-safety net, and widespread government intervention, is widely touted as the inevitable heir to Western capitalism, if only because of China’s huge size and consistent outsize growth rate. Yet China’s economic system is continually evolving.

Indeed, it is far from clear how far China’s political, economic, and financial structures will continue to transform themselves, and whether China will eventually morph into capitalism’s new exemplar. In any case, China is still encumbered by the usual social, economic, and financial vulnerabilities of a rapidly growing lower-income country.

Perhaps the real point is that, in the broad sweep of history, all current forms of capitalism are ultimately transitional. Modern-day capitalism has had an extraordinary run since the start of the Industrial Revolution two centuries ago, lifting billions of ordinary people out of abject poverty.  Marxism and heavy-handed socialism have disastrous records by comparison. But, as industrialization and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger.

First, even the leading capitalist economies have failed to price public goods such as clean air and water effectively. The failure of efforts to conclude a new global climate-change agreement is symptomatic of the paralysis.

Second, along with great wealth, capitalism has produced extraordinary levels of inequality. The growing gap is partly a simple byproduct of innovation and entrepreneurship. People do not complain about Steve Jobs’s success; his contributions are obvious. But this is not always the case: great wealth enables groups and individuals to buy political power and influence, which in turn helps to generate even more wealth. Only a few countries – Sweden, for example – have been able to curtail this vicious circle without causing growth to collapse.

A third problem is the provision and distribution of medical care, a market that fails to satisfy several of the basic requirements necessary for the price mechanism to produce economic efficiency, beginning with the difficulty that consumers have in assessing the quality of their treatment.

The problem will only get worse: health-care costs as a proportion of income are sure to rise as societies get richer and older, possibly exceeding 30% of GDP within a few decades. In health care, perhaps more than in any other market, many countries are struggling with the moral dilemma of how to maintain incentives to produce and consume efficiently without producing unacceptably large disparities in access to care.

It is ironic that modern capitalist societies engage in public campaigns to urge individuals to be more attentive to their health, while fostering an economic ecosystem that seduces many consumers into an extremely unhealthy diet. According to the United States Centers for Disease Control, 34% of Americans are obese. Clearly, conventionally measured economic growth – which implies higher consumption – cannot be an end in itself.

Fourth, today’s capitalist systems vastly undervalue the welfare of unborn generations. For most of the era since the Industrial Revolution, this has not mattered, as the continuing boon of technological advance has trumped short-sighted policies. By and large, each generation has found itself significantly better off than the last. But, with the world’s population surging above seven billion, and harbingers of resource constraints becoming ever more apparent, there is no guarantee that this trajectory can be maintained.

Financial crises are of course a fifth problem, perhaps the one that has provoked the most soul-searching of late. In the world of finance, continual technological innovation has not conspicuously reduced risks, and might well have magnified them.

In principle, none of capitalism’s problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalize the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income without necessarily involving crippling distortions, by minimizing non-transparent tax expenditures and keeping marginal rates low.  Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be better regulated, with stricter attention to excessive accumulations of debt.

Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism’s demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.