The god that sucked

Ezra thinks the back-and-forth Megan McArdle and I are having about monopsony is beside the point:

Search friction -- the factors that make it harder for you to find and acquire another job -- is probably not the main reason to believe that the monopsony model is applicable among low wage workers. Rather, it's search prospects that hold folks back.

. . . [L]ow wage workers rarely have much power to walk from the table. If you're totally replaceable, the employer won't care if you walk away from the table. And without that underlying threat,you can't bargain your pay into symmetry with your labor -- you're basically at the mercy of the employer and whatever laws have been passed to protect you.

I have a couple of responses to this. First, I just want to emphasize that the monopsony model does indeed assume that employers set wages. This is in contrast to the perfect competition model, which assumes that wages are set by markets, at the market-clearing level where labor supply meets labor demand. Individual firms are then wage-takers, and offer employees the going wage the market has set. The monopsony model also differs from matching models, which assume some degree of wage bargaining between employer and employee.

Ezra's not saying that the monopsony model doesn't hold that employers set wages, of course, but the asymmetry in bargaining power is one of the two main assumptions of the model (the other main assumption being important frictions in the labor market). And even though Megan hasn't addressed that particular part of the theory, I wanted to emphasize it, not only because it's important, but because I think it's more realistic than the standard model, and is one of the reasons I find the monopsistic model more attractive.

Ezra also says that if you want to understand low-wage labor markets you don't need to read Monopsony in Motion, you need to read The Grapes of Wrath. And while there's a sense in which that is deeply true, I write about economic theory because I believe it is Really. Fucking. Important. Bad economic models make for bad economic policies. Case in point: economic theory has often been used to argue against having a minimum wage, because the perfect competition model predicts that instituting a minimum wage will lower employment. But in fact, many studies of the minimum wage show that it doesn't lead to lower employment. Which tells you that something is definitely wrong with that model.

Elites set economic policy in this country, and many of their ideas about policy have been shaped -- and, I would argue, warped -- by economic theory.

For some people, economics can be a powerfully seductive discipline. The radically simplifying models you get in Econ 101 have an elegance that can be compelling, and that can cause you to see the world with new eyes. This can be thrilling; initiates into the economics priesthood can have the sense that they have seen through the Matrix, that they possess the Secret Decoder Ring of the Universe, that they've stumbled across the Key to All Mythologies. But if you do more reading around and more advanced study in economics, you quickly discover that the Econ 101 vision of the world is but a snare and a delusion.

To paraphrase something I wrote once, an intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, and that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, hyper-individualism, complete information, etc. But, of course, if you don't go any further than Econ 101, you won't know that the textbook models are not the way the world really works, and that empirical studies regularly produce results at odds with standard economic theory.

Many of our policy-making elites are still working within that very narrow Econ 101 context. And there's a very good reason for that: right-wing economists, above all Milton Friedman (probably the most powerful intellectual of the last century), led a movement that revolutionized the discipline. They kicked out the  Keynesians and heterodox types and instituted a doctrine of laissez-faire absolutism. So what students get taught in intro econ courses tends to be very much the version of economics that they created. A well-financed conservative infrastructure also relentlessly propagandizes in favor of Friedman-nomics. And the popularized version of economics presented by journalists in places like The Economist is very much in that "let the market work its magic" vein. Which, by some kuh-razy coincidence, just happens to be the version of economics that is most flattering, and useful, to our economic overlords.

So to me, it's very important to take on the kind of shallow, intellectually slipshod sophistry that passes itself off as the Higher Economic Truth. And yes, I'm looking at you, Megan McArdle.

Comments

[Lily Rose]

"I write about economic theory because I believe it is Really. Fucking. Important. Bad economic models make for bad economic policies."

Thank you. I just found your blog and will become a faithful reader, if for no other reason than this statement right here!

Plus you're talking about monopsony, which I personally think is one of the most interesting and most under- utilized concepts in modern econ theory, and one of the more interesting ones in these modern (*cough* walmart *cough*) times.

Yay! Lily

[Shane Taylor]

Kathy G. wrote, "Bad economic models make for bad economic policies."

Agreed. Yet the relationship is not that of a puppeteer and a marionette. As political eras change, so does economic theory. The direction of theory is not independent of the balance of power or major ideological shifts in society. As you note, there are feedback effects:

"Many of our policy-making elites are still working within that very narrow Econ 101 context. And there's a very good reason for that: right-wing economists, above all Milton Friedman (probably the most powerful intellectual of the last century), led a movement that revolutionized the discipline. They kicked out the Keynesians and heterodox types and instituted a doctrine of laissez-faire absolutism. So what students get taught in intro econ courses tends to be very much the version of economics that they created. A well-financed conservative infrastructure also relentlessly propagandizes in favor of Friedman-nomics. And the popularized version of economics presented by journalists in places like The Economist is very much in that "let the market work its magic" vein. Which, by some kuh-razy coincidence, just happens to be the version of economics that is most flattering, and useful, to our economic overlords."

In his summing-up post to the TPM Cafe debate over intellectual autarky and economists, Max Sawicky said:

"More to the point, if anything it will be events and politics that will reform the [economics] profession, just as politics has pushed the mainstream this way and that from the beginning. The barrenness of standard policy nostrums in the face of unsatisfactory conditions of life for the masses will shift the center of gravity, as Jamie [Galbraith] suggested in his first post."

http://tpmcafe.talkingpointsmemo.com/2007/06/03/the_best_theory_money_can_buy_1/

[DrDick]

"Many of our policy-making elites are still working within that very narrow Econ 101 context."

More to the point, as Upton Sinclair observed, it is nearly impossible to get someone to understand something when his paycheck depends on not understanding it. Our policy making elites personally benefit from the existing system and therefor do not want to hear that it is inherently unfair to most workers.

[jonnybutter]

[thanks for the great blog, kg]

[LeRoy-Rogers]

Barely scratching the surface of this Rant or Ramble,(no disrespect) I find that "monopsony" regarding "search friction" are part of a larger equation that proves nothing, but the ideas: A. equations are not reality B. everything is in the friction (the search and the light).

Of course, I may have self defined myself out of this discussion, but that seems just what Economics does to the individual.

Footnotes: a. Godel b. Confusionism

[in review of this comment, I concur with Lily and Shane and now, DrDick. - In fact, I am prodded to amend the (friction) above. Models are important, but will do only what is put into them, not always including the intention.]

[LeRoy-Rogers]

Still, unfinished digging(Scratching the surface of "tgts"), not to mention Shane's, "autarky" hooked me and now I will probably have more to dig and enjoy at TPM as well as a google of Jamie, I must thank Rick Perlstein for getting me here, http://ourfuture.org/blog-entry/little-knowledge-dangerous, and with a little irony, thank the "f" word as that was my original intention to rattle the choice.

(rattle: search friction, as in rant or ramble on)