Economics
Sometime a month or so ago, I was checking out BlogPulse and I was horrified to find that most of the blogs it thought were in my neighborhood were pretty right-wing. My dad’s theory was that I talk about economic concepts like "opportunity cost" and "signaling" and very few liberals use that sort of language. (It was also fairly soon after I added my new URL, which I think confused its software.)
Well, liberals and progressives who want to learn how to throw economics terms around with the best of them should check out the Center for Economic and Policy Research’s free Economics Seminar. If you’re in the DC area, you can attend in person. If not (or if Thursday evenings are busy for you), you can download the audio files. I haven’t listened to them myself, but they look like they should be interesting.
For a great example of how economic reasoning can be mis-used, check out this post on the elite colleges and SAHMs issue from Richard Posner at U Chicago. He’s arguing that professional schools should discourage applicants who aren’t going to work as much as possible by charging more for tuition, but rebating a portion for every year they work. It falls apart because of two fundamental flaws in his assumptions.
First, he assumes that the need/desire/ability to benefit from a good can be measured by willingness to pay for it. This is a classic assumption of market economists, but it only holds if people have comparable resources. If my son is willing to pay $5 for something, it means that he values it very highly, because that’s the full amount of his savings. If I’m willing to pay $5 for something, it doesn’t mean much at all…
Second, he assumes that there are positive externalities to use of professional skills:
"while successful lawyers and businessmen command high incomes, those incomes often fall short of the contribution to economic welfare that such professionals make. This is clearest when the lawyer or businessman is an innovator, because producers of intellectual property are rarely able to appropriate the entire social gain from their production."
I think this is a highly questionable argument — a lot of people would argue that sucessful lawyers often produce negative externalities. As Gary Becker, Posner’s blogging partner, responds:
"The private gain to a working lawyer or MBA graduate seems to capture pretty much all the social gain from their work. Posner stresses the potential innovations produced by these graduates, and the taxes they pay. But major innovations from graduates of these schools are surely rare, and taxes affect the incentives of everyone, not only professional school graduates."
This whole discussion is pretty ironic, since good parenting is among the best examples of an action where the person doing it captures very little of the social gain.
September 30th, 2005 at 9:45 am
Have you read “Priceless”? One of the authors, Lisa Heinzerling, was a professor of mine at Georgetown law and a former Posner/Brennan clerk and a U. of Chicago law grad. She’s one of the few academic law folks that I know of who is able to use the language of law and economics discourse accurately and very adeptly in a rebuttal of the standard willingness to pay/externalities/Pareto optimal/yada yada stuff that Posner senior advocates. “Priceless” is a book-length, lay-person discussion of her critique of the use of “willingness to pay” criteria to set “cost of a life” standards in environmental, health, and safety regulation. A more academic version appeared in the U.Penn Law Review, May 2002, “Pricing the Priceless: Cost-Benefit Analysis of Environmental Protection.”
September 30th, 2005 at 10:43 am
I think the other thing that is particularly troubling about the concept of “willingness to pay” is the insistence that people abide their whole lives by market decisions that they made in their teens and early twenties, for the most part. Don’t we already do that by putting law and medical students into enormous debt? Do we need to add to their burden by making the cost of parenting even higher? I’m with you, too, on the social value of good parenting being higher than the social contribution of most lawyers or business people.
September 30th, 2005 at 11:16 am
I may be missing something, and I only skimmed the Posner, but how does “charging more for tuition, but rebating a portion for every year they work” operate differently – in the end – from extending loans for tuition at the front end? The need to pay it back operates as a disincentive to drop out of the work force. My husband and I both took out extravagant loans for elite private schools. My husband dropped out to stay home, but the debt load I am now carrying gave us both pause. (And most people couldn’t afford to pay two school debts on one salary.) In Posner’s example, the rebate operates as an incentive to stay in, and I suppose we can quarrel over which influences behavior more, but I would argue if anything the disincentive to dropping out would (or should) be more effective (although carrying debt is as american as apple pie and baseball). Query whether we want to advocate indentured servitude as a “solution” to the “problem” of parents staying home, but I don’t see Posner’s proposal as all that novel.
September 30th, 2005 at 6:30 pm
Until I got to the last line of your post, I was going to comment that one of the key characteristics of parenting (at least in our society) is that it produces positive externalities. But these guys (Becker, at least) still tend mostly to think of kids as private rather than as public goods, so it’s not too surprising that Posner would miss that.
October 4th, 2005 at 9:40 am
Your disparaging of willingness to pay is completely incorrect given a relatively efficient student loan market. With the ability to borrow against future earnings WTP becomes a strong measure of worth.
Earl
October 4th, 2005 at 9:43 am
And as to your second criticism it also fairs poorly. You can, of course, cherrypick examples of professions where the professional proper captures the majority of the social gain. However, just from flipping through a handful of the “Where are you now” mailers than a friend of mine receives from the Crimson, the expected social gain over the whole cohort at elite schools is not largely captured by the actors themselves.
Earl