Blogwatch: April 2024 🍋

Free trade, the origin of government, the influence of Karl Marx, advice for economists, and growth in US inequality

Take time to appreciate free trade

“Take the time to appreciate the benefits of free trade”, say Gabriella Beaumont-Smith at the Cato at Liberty blog. And we should. Gabriella discusses how free trade brings us goods, services, and time. She writes,

“While we have not achieved pure free trade, the evidence is overwhelming that trade improves peoples’ lives—providing us with not only more stuff to consume but with more free time to spend on family, friends, and the other things we most enjoy in life”.

Variable oystercatchers (Haematopus unicolor). Dave Heatley

Origin of government

At the AEA website, Tyler Smith interviews Leander Heldring about testing two theories of the origin of government. Smith and Heldring discuss the formation of ancient states in Iraq.

Drawing on a paper in the American Economic Review¹, Heldring explains that in ancient Mesopotamia, states were more likely to form when large-scale irrigation projects were needed after losing access to a river. Heldring and co-authors argue that the pattern observed in the archaeological records is best explained by small settlements banding together to cooperate through new institutions. This supports the idea of government formation taking place to form a cooperative cluster — meaning that fundamentally, governments are there to help people get along. People can organise many things for themselves, but many activities that people undertake have redistributive consequences. This view of government is that it is an organisation we set up to help us manage such problems which would otherwise be unmanageable.

The influence of Marx (Karl not the brothers)

Timothy Taylor, at his Conversable Economist blog, writes on “The Reputation of Karl Marx and the Soviet Revolution of 1917”. Taylor asks when did Marx’s writing become especially prominent? During his lifetime or after? And how has his prominence trended in recent decades? Citations to Marx rose dramatically around 1917 and then kept rising. Before 1917 Marx was not cited more than several other socialist writers. But after the Bolshevik revolution, he became hugely more cited.

Politics and economics. Never the twain shall meet?

Taylor also writes on “Blinder on the Gap Between Economics and Politics”. Alan Blinder delivered the 2023 Daniel Patrick Moynihan Lecture in Social Science and Public Policy to the American Academy of Political and Social Science last October on the topic “Economics and Politics: On Narrowing the Gap”. I’m sure Edwin Cannan, the famous LSE economist, would be happy with the topic at least, as he wrote more than 100 years ago:

“The practical usefulness of economic theory is not in private business but in politics, and I for one regret the disappearance of the old name “political economy”, in which that truth was recognised”.

Taylor writes that Blinder opened his lecture by noting that economists have very little influence on public policy, despite what the general public seems to think. As George Stigler said nearly 50 years ago,

“economists exert a minor and scarcely detectable influence on the societies in which they live.”

This is a very different view from that of John Maynard Keynes.

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”²

To economists who want to take part in policy debates, Blinder offers two pieces of advice:

“The first pertains to those time horizons again. I have just emphasized that political time horizons are too short for sound economic policy. But it's also true that economists' time horizons are too long for politics.

“Specifically, we economists typically focus on the ‘equilibrium’ or ‘steady state’ effects of a policy change. For example: What will happen eventually after a change in the tax code or a trade agreement? Don't get me wrong. Those questions are important and highly pertinent to policymaking. We should not forget about them. But they are close to irrelevant in the political world because people don't live in equilibrium states. Rather, they spend most of their lives in one transition or another. Yet economists often brush off ‘transition costs’ as unimportant details. We shouldn't.”

Blinder goes on to say,

“My second suggestion is that economists pay far more attention to issues of fairness rather than doting almost exclusively on efficiency, as we often do. In politics, perceived fairness almost always trumps efficiency—and politicians understand that. Which is one reason why economic policy is often so manifestly inefficient. In saying this, I risk losing my economists' license. We do, after all, worship at the altar of efficiency for a reason: greater efficiency enlarges the economic pie.

“But I hope the economists in the audience will hear me out. I am not recommending abandoning efficiency as a guidepost, only that we temper our enthusiasm for efficiency with a bit more respect for political feasibility—which often hinges on perceived fairness”.

One could ask, why isn’t efficiency fair?

Inequality in the US is up. But by how much?

Brian Albrecht at Economic Forces asks Has Inequality Risen? He answers, probably. But most likely by less than you think it has.

Albrecht writes about a new paper “Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends” by Gerald Auten & David Splinter, forthcoming in the Journal of Political Economy.³ This paper challenges the oft-cited results of research by Piketty, Saez, and Zucman into US inequality trends.

Albrecht says,

“Auten and Splinter argue that income inequality in the United States has not risen nearly as much since the 1960s as Piketty, Saez, and Zucman claimed. Auten and Splinter estimate that the top 1% income share has increased only modestly, from 11.1% in 1962 to 13.8% in 2019. After taxes and transfers, they find almost no change, with the top 1% share rising just 0.2 percentage points”.

and

“If there weren’t a million headlines about the Piketty et al. numbers, I’d say the more interesting figure is actually about the whole distribution. Their analysis shows significant income growth across the distribution. They estimate after-tax real incomes nearly tripled between 1962 and 2019 for the bottom, middle, and top quintiles. So, their findings are more optimistic than the simple stagnating middle-class narrative we always hear”.

By Paul Walker

»»»»Visit Blogwatch & essays by Paul Walker for previous editions of Blogwatch.

Headwaters of Black Birch Stream, Two Thumbs Range, Canterbury. Dave Heatley

1. Robert C. Allen, Mattia C. Bertazzini, & Leander Heldring (2023). The Economic Origins of Government. American Economic Review, Vol. 113, No. 10, October 2023: 2507-45.

2. A quote from Chapter 24 of: John Maynard Keynes. (1936). The General Theory of Employment, Interest and Money. Macmillan and Co, Limited.

3. For further takes on how to interpret Auten & Splinter’s results viz-a-viz those of Piketty, Saez, and Zucman, see the blog posts by Noah Smith at Noahpinion, and by William Gale, John Sabelhaus, & Samuel Thorpe at the Brookings Institution.