Profit maximization

I read today David Colander’s article How to Market the Market: The Trouble with Profit Maximization and Aswath Damodaran‘s response in the most recent issue of the Eastern Economic Journal. By coincidence we’re also talking producer theory in my economics 101 class right now, so the timing is good. I favor Colander.

As the 101 story goes, profit maximization plus the assumptions of the perfectly competitive model generate maximal efficiency in the hypothetical economy. The Colander article establishes the historical context, entwined with the formal mathematical turn in economic theory and the methodological-ideological mashup of “free market” economics circa Friedman.

My feelings on the use and abuse of “efficiency” as a concept are well established. On top of this we have the evidence that learning about profit maximization induces students of economics and business to answer moral dilemmas involving hypothetical businesses differently than other people.

Something that bugs me is that I feel like “business” gets a pass on things that would never fly in other walks of life. I mean, sure United Airlines gets a justified backlash when a passenger is violently concussed on one of their flights, but the subtext is “well, yeah, they’re trying to make money.” Albert Burnenko was on to this at Deadspin after the United incident. The motives of the corporation are taken for granted to be inhuman.

In politics, behavior that would sink a typical politician a hundred times over rolls off the back of an “outsider” candidate from “the world of business”.

I struggle to think of examples from books, movies, or television in which firms, business, corporations—whatever you want to call them—are the good guys. Instead if you’re consuming the culture you’re getting a creeping collective paranoia about the callousness of the profit motive. This is what Angela Allan is getting at in this Atlantic article that I continue to assign regularly. I realize that the people who create art may have a particular perspective distinct from the average businessperson or person-on-the-street, but if culture creates and reflects itself then corporations are not the heroes of this story.

Damodaran concludes his response like so:

Implicit in that statement is the presumption that talking about private businesses making profits makes people feel queasy, a presumption which may be justified in the rarefied air of some parts of Vermont but it is not true in the rest of the world!

I don’t agree with this at all. Every semester I try to have my students think about what connotations they and their peers are carrying about “business”, “corporations”, “profit”. The connotations of “big business” are not positive. Economics is infected by association, and I know what the average person thinks of economists.

Or, more nuanced, the idea that a corporation is a callous automaton that is supposed to do whatever it can get away with to make as much profit as possible is so baked in that it doesn’t even seem like a bad thing anymore.”Of course” businesses are supposed to try to make as much money as possible, right?

On the other hand, Damodaran is quite right that there is nothing new in human suspicion of the pursuit of wealth just because economists came to adopt profit maximization into the canonical texts. It’s just another one of those aspects of our methodology that gives us a pedagogical PR problem.

I find profit maximization a lot riskier and more nefarious in econ 101 than utility maximization. It’s too real. It’s tricky enough to tease out the technical meaning of rational choice and preferences to sell utility maximization properly, but this ultimately lets profit maximization off very lightly since it doesn’t require the same technical ramping up. It just feels too obvious, and so I find myself having to work twice as hard to give it the interrogation it deserves. There’s no getting around either of them if you want to teach general equilibrium and the welfare theorems, and of course we do. I worry about the proportionality.

I also find it interesting the advent of behavioral economics has mobilized so much energy beating up on utility maximization, and the 20th century debates on profit maximization that Colander describes have given way to consensus. I think this is way out of proportion with the funkiness of the concepts. Utility maximization is abstract and flexible in way that profit maximization just is not. Profit is a real thing in the real world, very close to the model version of profit in its definition and spirit. Utility is not. Maybe we could pick the straw man of homo economicus up from under the bus, since I for one am much more relaxed about selling rationality than I am about selling profit maximization.

“Economist”

Published today at The Upshot: What if Sociologists Had as Much Influence as Economists? by Wren McDonald. I want to pick up on a couple of points raised since they really get at things I’ve written and obsessed about a lot over the years.

I agree wholeheartedly with the article’s premise that sociology—in particular ethnography—and other academic disciplines can bring just as much or more relevant knowledge and expertise to public policy debates as economics can. I’m going to get a bit depressing in a minute here so I don’t mean this to come across as a backhanded compliment or something. I do mean it seriously. My criticisms here are directed at very small words in the article that aren’t really about the article at all, but about us, economists, and our relationship to various publics, our professional PR, our toxic guild label. On the actual content of the article, the premise, the spirit, the recommendations I am quite on board.

Alright, let’s do this.

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Economism and healthcare

Dodgy economics is flying around left and right as the new GOP health bill is being piñata-ed from all sides this week. One particular strand is the charge of economism in the political rhetoric around healthcare. I want to talk a little about that since it relates to the teaching of introductory economics. In sum I want to claim that there is no great crisis in econ 101 being reflected here, but that there are reasonable grounds to suspect that marginal changes could have a big impact in how the median econ 101 student absorbs our material.

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A foot in the door, citation counts, the academic Overton window

What does it take to build a case for a policy? One interpretation of the increasingly fashionable Overton window is to redefine the limits of the acceptable by systematically injecting extreme positions into the discourse, to the point where the previously-extreme becomes normal. What’s important is to get a foot in the door.

As a practical matter, academic citations are one currency of discourse that can be used and abused in this way. Once an idea has a foot in the door, legitimized by publication in an established, well-regarded outlet, academic culture requires that it will inevitably be cited. The problem of distinguishing positive from negative citations is well known. Exhaustive citation of prior literature is the standard practice, and understandably, since for those with institutional access to academic journals, the cost is low and the benefits—engaging with other researchers, appeasing referees, demonstrating expertise—are quite high.

(On that note, check out this recent Journal of Economic Perspectives article for some I-can’t-believe-this-is-necessary-but-it-definitely-is tips on how to be a good referee. I’ve said before that explicit separation of powers would go a long way—editors make publication decisions, referees review without being asked for a recommendation.)

The influence of an idea becomes a self-fulfilling prophecy, then, as citation counts grow. The more subtle stage is when these metrics of influence escape the academic sphere and are used as evidence in external advocacy. Michael Waldman’s book on the Second Amendment makes a case that the strategy of the NRA proceeded from a “foot in the door” of law review articles promoting a particular interpretation, which generated debate and citations, providing a self-perpetuating corpus of material for lawyers and judges to cite in practice.

It’s a Catch-22 and not an easy one. Of course we want to encourage a broad range of ideas and arguments, but it is very difficult to engage with arguments without validating them. The squeaky, motivated wheel gets the grease of scarce academic attention, and so not only enters the discourse but crowds out other efforts.  The tactic generates loaded questions and a false dichotomy that moves the rhetorical ground underneath our feet independently of whatever argument we had originally wanted to advance. But this is nothing new. What is special to academia is the we must at this point cite the prior art, and citations are our currency. The institution validates all ideas in the same way, no matter what the average researcher truly thinks of them.

I think few academics would openly advocate for a world in which scholarly communications are passed through politicized filters. Yet that is the world we have. Everything is political, as they say, and so the decision to publish an argument inescapably exercises power far beyond the author and the potential readers.

In the context of economics, so often close to the ground of policy debates but whose intent and bias are so often misunderstood in the popular press, I think surveys of the economics profession are an undervalued weapon. These certainly exist but I think they deserve more resources, prestige, and promotion to act as ballast against a drift towards controversy, misconception, and squeaky wheels. Get them into our top journals and grant money for their thoughtful design and execution. Our areas of consensus should be as clichéd as the old “97% of climate scientists agree” line that I’m sure we have all come across at some time. People should grow bored of how often economists agree.