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Wednesday, December 12, 2007

The Big Divide in Economics

Greg Mankiw:

How do the right and left differ?, by Greg MankiwThe conclusion of today's ec 10 lecture: In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary.

  • The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
  • The right sees externalities as an occasional market failure that calls for government intervention, but sees this as occasional exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
  • The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
  • The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
  • The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
  • There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.

Quick reaction: I wouldn't agree with the fourth reason. I believe people are rational maximizers in the economic arena, or at least well-modeled that way, though problems such as limited or asymmetric information can confound choices. On the fifth, I would not term a competitive market-place as too powerful. It's non-competitive markets, e.g. monopolies, that are the worry. On the sixth, fair or unfair depends upon how well markets are functioning. If you do not believe that markets are competitive, or that opportunity is equal, then the intervention and redistribution may be correcting the outcome toward what a perfectly competitive, equal opportunity system would produce rather than away from it. It's not that we don't believe that competitive markets are fair, though I can only speak for myself, it's that we don't believe markets that deviate from perfect competition in important ways, i.e. have important market failures,  produce outcomes that have defensible equity properties.

Update: Jim Divine at EconoSpeak comments further.

    Posted by on Wednesday, December 12, 2007 at 03:42 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (72)

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