For the past three and a half years I’ve been co-writer and host of a monthly trivia night. What better way to take a break from your day job of setting and grading questions than by… wait.
I once was a research assistant on a project that called on participants in an experiment to make a decision that depended on the expected value of a randomly drawn object. The scenario and instructions were printed on a bit of paper and we asked players to put a checkmark next to their choice. So far, so good.
I read today David Colander’s article How to Market the Market: The Trouble with Profit Maximization and ‘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.
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.
After my first semester teaching Econ 101, I have lots to digest. I’ll post thoughts here over the next few weeks as I go through the process of revising for the second go-around.
(Pedagogy for the economists)
It’s time to retire the concept of “returns to scale”, at least in our intro/intermediate microeconomics. I don’t think it’s doing anything useful for us, it’s meaningful only as a pure thought experiment, and I think it confounds understanding of more relevant types of return to inputs in production.
Today we started producer theory in my Principles of Micro class and we watched Thomas Thwaites’ talk on his Toaster Project. I think it’s a good way in to talk about inputs, technology, scale, trade, and so on. So sharing it here in case it’s useful to anyone.
Sometimes the story is so good that you forget it’s just a story.
I’m wondering today, on an otherwise lovely Friday, how soon to introduce welfare economics into an introductory economics course.
I know. Bear with me.
I think one of the most fundamental jobs of introductory economics is to start to build the famous “invisible wall” between positive and normative economics. The textbook distinction is between questions about the way the world is—positive—and the way the world ought to be—normative.