Thursday, March 14, 2013

From the Empirical Archives: Labor Day Confession of a Lapsed Economist by Michael Perelman

Labor Day Confession of a Lapsed Economist
Michael Perelman

PHOTO: David Roseborough

Originally published in the September 2012 issue of Empirical

Many children are familiar with the way that repeating a word over and over eventually makes the word sound nonsensical. Some words, however, are nonsensical to begin with. 

Training in economics bears some similarity to this exercise. Students first learn about economic concepts in spoken language (albeit contaminated with some jargon), then as they advance they see the same ideas represented in diagrams, and then finally they learn to work with the same ideas with complex mathematics.

What was missing in this prolonged education in economics was a connection with the actual economy. Economists attempt to emulate science by presenting their ideas in the form of increasingly sophisticated mathematics or by applying new statistical techniques. The problem is that the subject matter is incomprehensibly complex because the basic building blocks of the economy largely consist in human behavior.

Simplification is necessary to subdue complexity. For example, basic theorems of economics rely on the assumption that people are completely rational. One might expect that the degree of rationality might be higher where everybody can depend upon a simple measure. Money seems ideally suitable in that respect. Accordingly, economists might seem to be on more solid ground when they look at the way that the economy functions in terms of monetary transactions. Of course, marketing specialists have made manipulation of the way people spend their money into something of a science. Their efforts seem more successful than those of my fellow economists.

What does all this have to do with Labor Day? In economics, the treatment of labor is embarrassingly nonsensical. Insofar as economics is concerned, we see the worker deciding whether or not to accept a wage bargain. In effect, workers are seen as merchants, who decide whether the going price for their product is acceptable or not. Their product is their leisure. What happens next disappears from economic analysis. Only later do we see the worker exiting the workplace with a paycheck. Except for this transaction, work, workers, and working conditions are more or less absent from economic thinking.

Some economists specialize in labor economics, but that specialty does not have much to do with work, workers, and working conditions. Instead, labor economists tend to analyze large databases to see what they can learn. They may take into account factors, such as education, race, gender, or even where the individual subject resides. The working experience generally escapes notice.

This treatment of the wage bargain skews reality in another respect. In effect, economics presents an uneducated single mother sitting down and bargaining with a major corporation over the terms of employment as if they were meeting as equals.

Dissatisfied with this kind of analysis, I recently wrote a book entitled The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers.

The book has several main themes. First, economists, in general, developed their analysis as an intellectual bulwark for laissez-faire. In doing so, they did a great disservice. The false scientific veneer of economics created an illusion of market infallibility. Business leaders, who were the supposed agents of this perfect market could not help but attribute some of this infallibility to their own abilities, while minimizing the contribution of those whom they managed. This unwarranted self-confidence was an essential ingredient of the recent crisis.

To make matters worse, by avoiding the specifics of work, workers, and working conditions, economists covered up the way a strong economy depends upon the talents and creativity of the people who do the work. By contributing to the failure to nurture those talents and creativity, economists have severely crippled the economy. Worst of all, the kind of treatment that workers experience in the environment that economists helped to shape has done incalculable harm. The neglect of the potential talent and creativity of the masses of workers who make the economy run has probably done far more damage than the current economic crisis.

Happy Labor Day.

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