Things I wish the left got about economics
This is a list of things that I wish more people- particularly people on the left- knew about economics. Because it is just a list, and I do not have time to write a textbook, a lot of it will not be self-explanatory, and will likely require further reading.
In general, the left needs to present a positive alternative to the way things are much more so than the right. Even if you believe that everything will work itself out after a revolution (dubious, citation needed) in the interim we make proposals about altering capitalism all the time, and it is essential that these proposals would actually be beneficial if they were carried out. Here are some considerations that are important in this regard.
The theory of public goods, why the market under-provides them per Samuelson’s condition, and the more general issue of positive and negative externalities. How to apply this to:
Basic research
Research generally
Public health
Public art and culture
Education
Environmental management and protection
How Pigouvian taxes- taxes of negative externalities to bring them in line with the social optimum- work. Same with Pigouvian subsidies.
How asymmetric information can ruin markets and create market power, common solutions and how to apply this thinking too:
Healthcare
Education
Safety standards
That regulation is not a costless alternative to Pigouvian taxation to prevent outcomes like pollution. That when regulation is the best solution (or is unavoidable) regulatory design and careful organization is important and need to be overseen by a strong, organized, compassionate and expertise-driven civil service- not based on representatives having random brain farts. This one applies to Americans generally- far too much regulation by senators and congressmen having brainfarts and not thought through in a systematic way.
More generally, the importance of a service-dedicated, public-minded, state capacity increasing high-expertise bureaucracy.
That the American approach wherein you underregulate, under enforce regulation and then sue each other every time something goes wrong imposes enormous costs.
The benefits of taxing things that can’t escape or can’t escape easily- mining, land, that sort of thing.
NGOs are not necessarily a benign force, especially when the government does things like taking care of the homeless through bloodsucking NGOs instead of properly taking on the role themselves. NGOs are generally inefficient relative to the government.
What growth is (the rolling out of technological improvements) and why it’s absolutely essential. What it is not (it is not, by definition, pouring more of the environment into the pointless trinket machine).
The importance of extended measurements of the size of the economy which value things like leisure time, reduced inequality (because extra money does less good for rich people), environmental degradation and life expectancy like the Jones-Klenow measure and Nordhaus and Tobin’s Measure of Economic Welfare. There are two types of measures- measures like HDI which arbitrarily “clump” a bunch of good things for a country and call it an index (I do not like these) and measures that start with GDP, but factor in quantitative adjustments for variables like: 1. Inequality based on the declining marginal utility of income 2. Costs of Environmental degradation 3. The value of leisure time 4. Mortality etc.
How to argue the line on the minimum wage. How the price floor objection works in theory. Empirical results suggest that the minimum wage has little or no effect on employment at the margin, the monopsony theory and how this might explain the lack of effects.
That while a capitalist economy needs small and large businesses, a smaller business is not necessarily better, in fact for many purposes, larger businesses lead to better outcomes- higher wages, somewhat less lawbreaking, etc. etc.
The basics of optimal tax theory. Empirical studies, based on behavior and questionnaires, show how additional income matters less as it increases and what deadweight loss through transfer is (and how it is often exaggerated).
The existence of positional goods, and their implications.
As Mill explained- taxes on positional goods have a special advantage. People buy them to compete with each other, hence they may not be unduly troubled by them getting more expensive to buy because they are more expensive for everyone else as well.
Generally positionality should be discouraged. If people must compete, they should be encouraged to compete in non-monetary areas, for all sorts of ethical and economic reasons.
That utilitarianism can be used as a rough baseline to assess outcomes, even if one doesn’t endorse utilitarianism. Utilitarianism does not lead to unequal outcomes, on the contrary, utilitarianism implies that resources mean massively more to the worst off than the best off. One doesn’t have to believe in utilitarianism to find questions like “which tax system would make people happiest overall” interesting.
That nationalizing firms, especially utilities, is an option for critical utilities and works pretty well, and that often nationalization is far more efficient than trying to make businesses like utilities who do not want to act in a public-minded way, act in a public-minded way through an endless web of regulations.
The government can acquire a sovereign wealth fund by, for example, investing pension money in a state-controlled index fund.
How monopolies can reduce output. On the other hand and potentially counterbalancing, positive returns to scale.
Whether pensions are funded publicly or privately, they depend on the transfer of money from working-age people to the elderly. “We won’t be able to afford public pensions in the future, so we’ll have to use private pensions” is a nonsense. The problem is transferring resources from young to the old. This doesn’t go away if the old get their money through rents, rather than taxes. Indeed, it likely becomes worse, since inequality in the size of private pensions means that the rich elderly take many times more resources.
The ethical points made in The Myth of Ownership By Nagel & and Murphy and Coercion and Distribution in a Supposedly Non-Coercive State
The problems of information economics, and how market socialists try to address them.
The right will always object to everything by saying “but there are tradeoffs”. There are tradeoffs, this is real and should not be denied. In any particular case the tradeoffs may be substantial or not, and if they are real, they may or may not be worth taking.
Capital investment is, as a general rule, good it raises wages, it increases total income. Capital investment should be a political goal of the left. We do not want the rich to consume their surplus on luxury goods, as they often do, we wish to keep them in a cycle of reinvestment.
It’s worth thinking about taxes in this regard. Dividend and buyback taxes are a great way to prevent money from leaving a corporation and returning to its owners, while rewarding reinvestment.
Capitalists underinvest relative to the social optimum for several reasons:
The holdup problem: In very simple terms, much of the benefits of investment will go the workers, not them. Suppose an investment will cost the capitalist 600 dollars, will raise the capitalist 500 dollars, and will raise the workers 500 dollars. 500<600. From the point of view of society, this isn’t a reason not to invest, since extra wealth to workers is good, and total additional wealth generated exceeds costs, but it doesn’t suit the capitalist’s self-interest, hence they will not make the investment. In theory, this could be solved in several ways- e.g.: (i) bargaining between the capitalist and the workers (but there would be problems in trust since the worker’s bargaining position will change after the investment). (ii)
Positive externalities of investment, which are likely large
Capitalists, being much poorer than society as an aggregate are more risk-averse than society as an aggregate should be. Consider an investment with a 90% chance of failure, a 10% chance of 20x returns and a one billion dollar cost. It can be extremely difficult to find capital investment for such projects from the private sector, but such investments are much more tempting from the point of view of the state because of the sheer scale of its capacity for many different forms of investment.
The importance of a general education in economics. Everyone should understand the basics.
Detail matters if you’re talking about a specific policy. Policy should never be pure reaction. Nothing is ever so important it doesn’t deserve careful thought.
Neoclassical economics is not a right-wing apparatus. Many of its inventors were socialists. Austrians are distressed by it because they (rightly) recognize that it can be used for mechanism design to control the market.
You must always be clear about whether or not you are making a serious proposal or critiquing the way things are.
The existing work on market socialism.
Existing time discount rates used, e.g. in cost-benefit analysis are often wrong because A) They often assume that investment by the government will 1:1 crowd out private investment and B) They often assume an inherent time weight on when the value accrues. At least arguably, we shouldn’t place a strong inherent weight on whether benefits accrue now or later.
Let me give an example of putting this stuff into practice. Just the other day I saw someone proposing on Substack that rich workers should be taxed less, because they are the workers most likely to produce positive externalities. When a scientist, for example, chooses to work less, they are not just harming their company but all the billions of other people who might benefit from their creations. The scientist and their company do not capture all the benefits of their new technology- so the last thing we want is to tax them more.
A properly informed left could respond to this with a moment’s thought. It is inefficient to reduce taxes on the richest for the purpose of encouraging innovation, because not all rich workers are engaged in innovation, and even those that are engaged in it aren’t all engaged to the same degree. The high-frequency trader, the lawyer, even the doctor- none of these produce much by the way of positive externalities even if (as in the case of the doctor) their work is very important. The more efficient approach would be to give Pigouvian subsidies R&D and other positive externality-producing work. In general, changing the tax rate for a whole band of income, regardless of the labor that earns it, is an incredibly clumsy way to promote preferred types of labor.
But these obvious counterpoints go unmade because no one bothers to learn the logic of the theoretical apparatus they are crafted in. Be like Marx, who both learned and sometimes even respected, the economics of his day. Remain fully aware of both its strengths and weaknesses.
These are a number of great points, as an economics graduate student I would add:
The importance of understanding economic reasoning, logic, theory, and arguements so that you are not mystified when right-wingers/libertarians use clever-sounding economism logic for what are essentially ideological preferences ( especially when it comes to minimum wages, deficit spending,and social spending). Basically, be able to look past the appeal to economics that used to justify so much awful bullshit.
As the economist Joan Robinson said: "The purpose of studying economics is to learn how to avoid being deceived by the economists."
Maybe not a textbook, but I would be interested in something like a reading recommendation list, you already mentioned some here.