Surreal Encounter: Pure Economics and Real People

by on Monday, 03 March 2014 Comments

Many years ago, when I was settling into my first full-time job in the US and before I even knew if my political alignment was with the Left or the Right on this side of the planet, I met the son of a Nobel-Prize winner in economics, a well-known economist himself. Let's just call him SNW for convenience. It was a small gathering. When the hostess introduced me to him and his wife, they were busy solving a math problem (I cannot possibly have made this up)! After briefly greeting me, they continued to be absorbed in this exciting game for a while until they both solved it almost at the same time and smiled to each other. What a match made in heaven...

Like a recovering addict, I was drawn irresistibly to their nerdy game. I used to love math because it represented reason, clarity and certainty. I asked to work on the problem, even though I had not tackled math after high school and forgot nearly all the formulas. Luckily, there was nothing in the problem that could not be solved by basic reasoning, or bon sens with which Descartes assures us that we are pretty much equally endowed. It involved finding out how a perfect equation became absurd in the course of seemingly logical operations. The culprit, of course, was a hidden zero that materialized somewhere along the way. It took me longer than I wanted to solve the problem, in a humbling test of my ego and perseverance. I surely got rusty, but at least can flatter myself to be a worthy interlocutor of SNW.

You may have noticed that some people enjoy being teachers while others being students. It is not hard to figure out who was which as we started to chat about economics. I genuinely wanted to know more about his field and had absolutely no intention of challenging him on his turf. When he praised free market economy as the best possible system, however, I could not help but wondered if in some cases it might be unfair to some people. When he refused to admit it, we both became stubborn. Even though he possessed incomparably more knowledge on economics, my task was easier: I merely had to prove that free market can be unfair sometimes, and he had to defend it in all situations.

I started with the US textbook market, of which I had some direct knowledge. It seemed unfair to me that authors of first-year textbooks make much more money because there are always more students at the beginning level, with the consequence that it is extremely difficult to find good textbooks at advanced levels, while the market is flooded with so many lower-levels textbooks that publishers send unsolicited copies to professors hoping they would adopt them. Generally speaking, first-year textbooks are of better quality as publishers invest more money in the review and editing process knowing they can sell more copies, while upper-level textbooks sometimes contain many errors. SNW said it proved that market was working beautifully, as competition would weed out weaker products and drive down costs; since we let the market determine the value of a product, we should not think that authors of advanced-level textbooks deserve better pay, not if fewer people need their product. I countered that competition surely did not drive down the costs of US textbooks, notoriously expensive. In addition, a shortage of good textbooks at the advanced levels hurt educational outcome, but a free market has no incentive to care about that. Neither can we claim that during the course of competition it is necessarily weaker products that get weeded out. Sometimes an unlucky author chooses a textbook company that becomes bankrupt quickly, and in the chaos of a takeover, good products, well regarded by both professors and students, can be discarded; at the same time, a financially well-run company, having decided to "invest" in a textbook, would spend money to support and improve a poor product for as many years as possible. When I was a Teaching Fellow at Boston College, lured by successful marketing, we once adopted an intermediate French textbook that contained so many errors that the publisher paid us each $100 to help clean up them. It is as if in order to be a successful textbook writer you need to act like a stock picker. It is not obvious: over the years, I have seen respectable companies that produced excellent textbooks went bankrupt, while the ones that dominate the market may not necessarily offer better choices. SNW asserted that free market always works efficiently, unless there are factors that distort it. With arguments like that you can never lose. He did not say, and I later found out from his writings that, "market distortions" include government regulations, taxes, court, police, public education, etc.

SNW remained unfazed by various other situations I mentioned, until I brought up the case of retirees with fixed income in a high inflation environment, with the specific example of my father. Before he retired, my father was a senior engineer and vice president of the most important construction company in my home city (the president was always the Party leader). He was the onsite director of numerous projects in our city: bridges, water supply systems, and the TV Tower, as well as several construction works in Tibet. In order to meet the often arbitrary deadlines (finish this bridge as a gift to the National Day!), he often had to work overtime and sleep in temporary sheds with construction workers. Growing up, I learned not to miss him as he was so often gone for extended periods of time. He retired during the early ninetieth with what was considered a very high pension for a small city. With only modest adjustments, his pension did not keep pace with China's skyrocketing inflation, unlike those of civil "servants".

Perhaps too "nice" to argue with me over my father's story, or perhaps he knew periods of high inflation existed in the US as well, SNW conceded that "inflation can hurt savers, and retirees are savers." He stopped short of admitting that free market can be sometimes unfair; and as naïve as I was I understood the distinction: you can be hurt by something not because something is inherently unfair, but because you are not smart enough to protect yourself. Smart people like SNW would not be hurt by inflation because they know how to hedge against it.

I have not since run into SNW, not belonging to the same world, but my imaginary quarrel with him has continued over the years as I started to pay more attention to the impact of economy on people, and survived a few market downturns aided more by ancient philosophy than modern economics. What bothers me now as then is his dogmatism. When we believe that a system, or any system, is the best, it takes away our motivation to design ways to mitigate its shortcomings and improve its outcomes. We should not have to choose between a pure, hundred percent planned economy and an equally pure, hundred percent market economy. In the name of freedom we have submitted ourselves to the blind force of a global economic system that market fundamentalists like SNW would want to let run on a logically programmed autopilot. I hope against hope that SNW can remember and apply the lesson of the math problem we solved: there can be a zero somewhere that renders your seemingly logical equation nonsensical.

(Image extracted from the movie Rites of Love and Maths)

Jin Lu (魯進)

Born in Sichuan, China, I have studied French literature in Beijing, Boston, and Paris. I am currently a professor of French at Purdue University Calumet, USA. Joséphine Baker has two loves; I have three, or perhaps more? If you do not want to tear yourself apart, you need at least three things, and that gives you balance. I enjoy dreaming, reading and writing, among others.

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