WHY DO ECONOMISTS DISAGREE?
Thurow, Lester
The public perception that economists do not agree upon anything is probably even more disconcerting than their failures in prediction and control. Something happens and then upon the TV screen...
...The second set of econometric studies focuses on aggregate labor-supply functions and is dominated by the labor-supply characteristics of the average worker...
...The elasticity of the demand curve is estimated to be less than one by both liberal and conservative economists...
...Bureau of the Census, Current Population Report, Consumer Income Series P 60 #119...
...If legal loopholes are not "fairly" distributed, then the average citizen can simply go underground and make some loopholes of his own...
...final consumption, for example, drops to 13 percent...
...Whatever the connection between equity and efficiency, it is not a simple one where the willingness to tolerate inequality guarantees efficiency or is necessary to achieve efficiency...
...Physicists can predict heavenly motion but they cannot control or influence it...
...Most of the disagreements are about noneconomic aspects of economic problems...
...Given a clever economist and completely elastic nonobservable concepts such as utility or psychic income, any activity can be described and organized as if it were the outcome of a free-market maximization process...
...None of these five uses automatically leads to the others...
...In Table 1 various countries are ranked in accordance with their economic performance from 1960 to 1977...
...Adverse work-effort effects were found to be small...
...Different data sets would present slightly different rankings in the degree of inequality and extent of redistributional effort, but they would not alter the conclusion that there is little or no rank order correlation between equality variables and economic performance or efficiency variables...
...Wherever theory Y persons look, they see industrious people who are working without harsh whips and large carrots...
...No economic dispute better illustrates the problem of value judgments than the perennial dispute over the minimum wage laws...
...Yet it is fair to say that the experiments changed the minds of not one U.S...
...There is a 5 to 1 gap in the relative earnings of the top and bottom quintiles for fully employed white males, but a 27 to 1 gap for everyone else...
...Hence we cast a fundamental ethical debate as to what constitutes the good society—a society with a high degree of equality or a high degree of inequality—as an economic debate...
...there are no public policies so bad that everyone's income goes down...
...1) They can be used to describe and organize events...
...If governments want to stop the underground economy, there are also many enforcement procedures that can be employed...
...Whatever the theoretical effects, the actual effects are much smaller...
...Nonlaboratory scientific phenomena are subject to just as much disagreement as those that exists among economists...
...The minimum wage raises the income and employment of adults, particularly females, while concentrating unemployment among teen-agers...
...Scientists are only in agreement when they are talking about some phenomenon that can be produced and replicated in the laboratory...
...One set of interview studies focuses on the work-effort effect of high taxes on high-income individuals...
...4) They can be used to design policies to influence and control economic events...
...To understand a phenomenon is to be able to predict the outcome of a laboratory or controlled environment experiment where "other" variables are held constant and stochastic processes limited...
...Every policy has income distribution effects...
...Inequality has to be justified as leading to something else...
...First, there must be some hard economic information as to whose income will go up, whose income will go down, and what is the net result of those gains and losses...
...Aggregate laborsupply functions consistently show that taxes either have no impact on work effort or that the labor-supply curve actually bends backward...
...Often the failures are interrelated...
...Different economists have different answers to the "ought" question, even if they agree on the outcome and the distribution of gains and losses...
...Markets are as close to perfection as they can be, not because we have proved it but because we know that it must be so...
...Lacking support on the "laziness" front, they attacked the programs for promoting divorce and breaking up families, since there was evidence that the poor used some of their extra money to purchase legal divorces although there was no evidence that the extra money increased the poor's divorces-informal separation or desertion...
...An industrial psychologist, McGregor, has constructed what he calls theory X and theory Y. A theory X person believes that people are motivated with draconian rewards and punishments...
...If presidents (like Nixon) can legally or illegally avoid paying taxes, the average citizen will do the same...
...Given all of this agreement, why the enormous disputes about the minimum wage in general and a subminimum for teen-agers in particular...
...Everyone has often heard that "more equality means less growth" and, given the economic problems of the 1970s, countries must decide to opt for "more rapid growth and less equality...
...Having disguised an ethical debate as a technical economic debate, it should not be surprising that the result is confusion, with economists weighing in on each side of the issue...
...The only question is the size of the effect...
...Liberal and conservative economists most frequently disagree on who ought to be hurt and who ought to be helped...
...The third set of studies, focusing on the work behavior of those on welfare, has already been mentioned...
...Some good performers have a high degree of inequality and no redistribution...
...These studies have uniformly found that even when taxes were much higher than those now in place (there is now a 50 percent maximum tax rate on earnings), there was no adverse effect on work effort...
...If the underground economy is growing, it is clearly related to changes in other cultural values or to the examples set by national leaders...
...But if the performance and equality of different economies are examined, this dilemma does not exist...
...2) They can be used to understand what would happen in a controlled environment...
...Underground economic activity is still economic activity...
...The same problem exists in forecasting...
...Everyone agrees that if the elasticity of the demand curve is less than one (a 1 percent increase in wages leading to a less than 1 percent reduction in employment), the total income going to those in the low wage group (employed and unemployed) will go up...
...5) They can be used as normative models to infer how a perfectly rational homo economicus should act and how his activities should be organized...
...Everyone agrees that it will raise the wages of other intramarginal workers who remain employed and get the new higher wage rate...
...There is no relation between the amount of inequality that different countries have been willing to tolerate and their economic performance...
...3) Therefore the actual economic game must be a free market-maximizing economic game...
...There is nothing wrong with formulating models with unknown and in principle unknowable variables if everyone is clear that the result is merely a descriptive model that may be useful in cataloguing activities...
...But this has been a period with a substantial reduction in the progressivity of the tax system...
...Economic forecasts are often wrong, but scientists can accurately forecast what will happen only when they are working in laboratory conditions...
...Earthquakes, major floods, volcanic eruptions—they are all more unpredictable than economic events...
...Man is basically a beaver...
...There are lazy people and industrious people...
...181 (2) More efficient economic games drive less efficient economic games out of business...
...As a result millions of workers are simply illegally paid less than the minimum wage...
...Norway, the country with the largest pre-tax to post-tax movement toward equality, has a relatively good economic performance, but so has France, a country with relatively little or no redistribution according to these data...
...The results of such studies can be confirmed in another way...
...Everyone agrees that the minimum wage will create some unemployment for those whose productivity is below the minimum wage...
...There is also agreement that the minimum wage laws are only loosely enforced with minimal penalties for those who are caught violating them...
...What should we do about problem X?" Where X may be inflation, productivity, unemployment, or some similar problem, this question is commonly posed and answered by economists, but it is a question designed to produce disagreement...
...Given income and substitution effects both working in the same direction, the result was not surprising or alarming...
...Economic growth does not require it...
...The minimum wage dispute is not a dispute about economics, but a political dispute as to whether government should or should not intervene in the labor market to alter market incomes—in this case to raise the income of low-wage workers...
...Put in the context of such scientific disagreements and failures, the disagreements in economics are not surprising...
...Compare the distribution of earnings for fully employed white males with that for the rest of the labor force (see Table 2...
...Policies can hope to influence the economy, but they cannot hope to control it...
...There are many routes to economic success— some paved with equality, some paved with inequality...
...The real Gross National Product has not become smaller even if there has been a reduction in the statistically measured GNP Table 2 Distribution of Earnings in 1977 Quintiles Full-Time Full-Year White Males 7.7% All Other 1.8% 2 13.9 7.2 3 18.2 15.8 4 23.5 27.0 5 36.7 48.2 Mean Earnings $16,568 $5,843 Source: U.S...
...When it comes to burning more coal to generate electricity, meteorologists cannot agree whether the extra CO, will cause the earth to warm up, melt the polar ice caps, and flood most of the major cities of the world, or whether the extra CO, will cause the world to cool off and crush our major cities in another ice age...
...If we were to adopt policy Y, whose income will go up, whose income will go down, and how much...
...To understand the chemistry and physics of interactions between air, water, and earth in the laboratory does not necessarily allow the meteorologist to predict the weather...
...But Americans are, uncomfortably, ethically arguing for more inequality for its own sake...
...Wherever a theory X person looks he sees lazy people who confirm his belief that harsh economic whips and large economic carrots are necessary to keep people working and saving...
...THE WORLD is also a complicated place where you can see what you want to see...
...Many of the disputes among economists come from a failure to understand the many different uses to which economic models can be put...
...so they set up some remote telemetry instruments in the Pacific Northwest, but they put their instruments on the wrong mountain...
...They may or may not have reached real political limits on redistribution, but most of them have not reached any harsh economic limits...
...In most circumstances that second question will generate a substantial amount of agreement...
...Countries at the bottom of the performance distribution do not systematically make larger redistributional efforts...
...Economics is a nonexperimental science and disagreement is common in nonexperimental sciences, where it is impossible to conduct laboratory experiments with their tight control of extraneous variables...
...The Japanese were most efficient with a 7.5 percent rate of growth of per capita GDP, while the British were least efficient with a 1.9 percent rate of growth of per capita GDP The rest of the data in Table 1 indicate the degree of inequality in each country and the extent of the redistribution efforts...
...To be a model in the other four senses, the model must be capable of being proved wrong...
...178 Economic recommendations also differ because there are many routes to success...
...Is the good society a laissez-faire society or is the good society one where government intervenes to alter earnings...
...Not understanding the process whereby these variables are generated, they do not understand economic actions...
...This is the scientific part of every economic problem...
...As a consequence economic recommendations contain two major elements...
...In 1980 there was a great dispute among nutritionists in the United States as to whether Americans should, or should not, eat butter...
...Two factors accounted for this result...
...senator or congressman...
...With the single exception of heavenly motion, physical scientists predict outcomes in controlled environments...
...If the political scientists cannot predict revolutions in Iran or wars in the Middle East or geologists cannot predict future oil supplies, then economists cannot predict energy prices...
...There are only chemists who in the rest of their lives happen to be liberals or conservatives...
...Advanced industrial societies may not wish to increase income equality, but this has to be argued as an ethical proposition...
...This is confirmed in the enormous increase in working wives...
...3) They can be used to predict what will happen in the real world...
...Very few economic activities are laboratory phenomena...
...For the types of individuals who actually pay high tax rates, income effects (with a lower take-home income you must work harder to achieve some standard of living) dominate substitution effects (with a lower take-home wage rate leisure becomes more attractive), and such individuals face a wide variety of nonmonetary incentive systems...
...If society chooses to raise the savings rate with more inequality rather than one of these other options, that is a political decision and not an economic necessity...
...And everyone agreed that the existing welfare system with its implicit tax rates that could go far above 100 percent was more detrimental to work...
...For both economist and scientist, forecasts are difficult...
...But work-effort studies do not indicate that the United States has reached any redistribution limit...
...Economic understanding is also often confused with the ability to make accurate economic predictions...
...All of the economic facts are widely accepted by both economists who are for and against the minimum wage laws...
...The only problem is to describe the game in the right way...
...Second, however, there is an ethical value judgment as to whose income "ought" to go up or 176 down...
...Before Mt...
...With the exception of the Japanese, the three countries that spend the least on income maintenance are at the bottom of the performance distribution...
...others have a low degree of inequality and substantial redistribution...
...PUBLIC POLICY RECOMMENDATIONS are subject to dispute for yet another reason...
...Although the use of economic models to design policies to influence economic events springs from our understanding of economic processes, economists have not placed enough emphasis on the distinction between control and influence...
...Both theory X and theory Y people can easily observe real people who confirm their theories...
...The answer is simple...
...But dynamic real world economies are another matter...
...To judge economics in terms of its predictive record is to judge it in a way that no other science is judged...
...No agreement was possible in what after all seems like a relatively trivial problem...
...More inequality would produce more savings, but it is equally clear that there are many other ways to raise a society's savings rate...
...Most physical sciences understand rather than predict...
...When production leaves the taxable sphere it may affront our political institutions, but the only economic penalty is a reduction in government revenue...
...180 In the U.S...
...They are no better, for example, at predicting the real world's meteorological phenomena than economists are at predicting the real world's economic events...
...Poor economic performers are equally mixed in terms of the degree of inequality and the extent of their redistributional effort...
...No one talks about liberal or conservative chemists...
...In its extreme form economists cling to the following syllogism: (1) Free market-maximizing games are the most efficient economic games that man can play...
...It is only partly a technical economic problem...
...Similar conclusions can be reached looking at the proportion of GDP going to government consumption or the proportion of GDP going to income maintenance activities...
...To find the professional economic disagreements, a different question must be asked...
...If the weather cannot be predicted, then economists cannot predict food prices or the demand for heating oil...
...Unless you believe that the culture in which women, minorities, and unemployed white males exist is different from that of employed white males, there is every reason to believe that a reward structure capable of keeping white males on their economic toes is also capable of keeping other Americans on their economic toes...
...A belief in a harsh trade-off between equity and efficiency is the keystone of many economic arguments...
...The 1968 tax increase influenced the economy—it grew more slowly than it would otherwise have done—but the economy expanded faster than was desired or predicted...
...Governments can run surpluses in their budgets, require greater funding of private or public 179 pension plans, decrease consumer and mortgage credit, or do a host of other things to raise savings...
...Three kinds of workeffort studies have been done in the United States...
...Saint Helens erupted, the MIT earth sciences department thought something might occur...
...If defense spending is removed from the totals, the differences in final consumption are small...
...The studies reached a common conclusion...
...Individual work incentives are more of a problem since there is no option to individual work effort...
...A model of how homo economicus ought to act does not necessarily let the economist accurately describe how homo sapiens actually does act...
...Pre-tax, the country with the most equal distribution of income, Japan, has the best performance while the country with the most unequal distribution of income, the United States, is near the bottom of the performance distribution...
...There is agreement on who those losers are...
...Consider the case of the United States—one of the poor economic performers...
...What is fought out as if it were a dispute about economic facts is in reality a dispute about the values that society "ought" to follow...
...all job choices represent income (psychic plus money) maximization...
...If taxes are reduced to solve the problem, that is a political decision and not one required by economic necessity...
...For the same reason that economic events are not predictable, they are not completely controllable...
...THE UNDERGROUND ECONOMY 1S also advanced as evidence that income redistribution has reached economic limits...
...A theory Y person believes that man is basically a working, tool-using animal...
...Their technical disagreements on who will be hurt and who will be helped are much less frequent...
...No one doubts that there is a direct trade-off between more equality and efficiency in a perfectly competitive static neoclassical economy operating at 100 percent efficiency...
...Reducing the level or progressivity of taxation is only one of many options...
...Those who were convinced that the poor would retire to the beach if they were given a negative income tax remained convinced...
...Ought America to raise unemployment to stop inflation...
...They are no better than economists when it comes to real world events...
...At any moment in time there will be unpredicted influences and stochastic shocks other than the policy variables that were adopted...
...As can be quickly seen there is no rank order correlation between performance, the degree of equality, or the extent of the redistributional effort...
...Because economists cannot predict or measure the elastic nonobservable variables, they cannot make economic predictions...
...If current tax rates were a strong disincentive to work, they would not be entering the labor force in massive numbers since they often enter at their husband's marginal tax rate...
...Can economic efficiency really require five times as much inequality among minorities and women as it does among white men...
...By the very fact that we use the words "liberal or conservative" with respect to economists, we are saying that the discipline is somehow different...
...The maximum rates are lower on both earnings and capital income than they were in the '40s, '50s, and early '60s...
...It still contributes to output and well-being...
...Something happens and then upon the TV screen appear two economists who in the 30 seconds alloted them seem to be giving diametrically opposing economic views...
...There are no public policies so good that everyone's income goes up...
...Wide differences exist in the extent to which countries succeed in redistributing income...
...In terms of children's nursery rhymes man is basically a grasshopper who likes leisure and must be forced to work and save...
...But perception of disagreement is not surprising given the characteristics of economics...
...Japan, a country with one of the world's highest savings rates, is also a country with one of the most equal distributions of income...
...It is 177 possible to construct disincentives to work and save that will stop man from working, but relatively mild rewards and punishments will keep him at work...
...The relevant question revolves around the proportions of each...
...Table 1 Performance and Redistributional Effort Country Real Per Capita GDP Growth 1960-1977 (Income Distribution of Income Government Income Pre-Tax Post-Tax Final Consumption Maintenance top 20%/ (Percent of GDP) (Percent of GDP) income bottom 20%) Japan 7.5%* 5.6% 5.2% 10% 3% Spain 5.0 - 7.1 10 France 4.1 8.6 10.9 15 12 Norway 4.0 8.3 5.9 19 10 Italy 3.8* - 9.1 14 10 Canada 3.4 10.1 8.2 20 7 Netherlands 3.4 7.8 6.6 18 19 Germany 3.1 7.9 7.1 20 12 Sweden 2.7 6.8 5.6 28 9 Australia 2.6* 5.9 5.9 16 4 United States 2.5 11.8 9.5 18 7 United Kingdom 1.9 7.5 6.1 21 8 *1960- 1976 Source: Malcolm Sawyer, Income Distribution in OECD Countries, Organization for Economic Cooperation & Development, Occasional Studies, July 1976...
...Individuals cut their work effort 5 to 10 percent when they were given a poverty-line income ($8,414 for an urban family of 4 in 1980) and were facing tax rates in excess of 50 percent...
...The ability to give such descriptions, however, does not mean that the model is an economic model in any of the other four senses...
...Without understanding, influence or control is impossible...
...Power, prestige, promotions, fame— they all help to keep high-income individuals working hard in the face of high marginal tax rates...
...If economists disagree that sharply, how can they possibly know anything...
...Aggregate incomes are up, but that still leaves a group of losers...
...The United States has just completed a large number of negative income tax experiments that attempted to study the work incentive effects of different tax and benefit rates...
...Economists disagree much less about economics than the general public thinks...
...No one—scientist or economist— can predict the large irregular stochastic shocks that regularly occur outside the laboratory...
...It is an important question, but not primarily an economic one...
...Yet as can be seen from the data, white males have a much more equal distribution of earnings than the rest of the population...
...Yet economists often talk as if they can do all of these things simply because they are able to build a descriptive model...
...All consumption purchases represent utility maximization...
...Other than recommending that government get out of the way (there are even recent tendencies to eliminate this reservation), there is nothing that must be done to ensure maximum efficiency...
...This ethical value judgment has nothing to do with technical economics, but it is usually at the heart of differences between liberal and conservative economists...
...But most people are not willing to change their basic view of human nature based on what must inevitably be imprecise statistical evidence as to what those proportions are...
...the growth in the underground economy, if it has grown, is supposed to have taken place since the late 1960s...
...High proportions of government consumption seem more correlated with economic performance, but the differences mainly reflect military spending...
...But here again the evidence does not lead to that conclusion...
Vol. 29 • April 1982 • No. 2
