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WORK FOR ALL - REPLY

 

JOHN QUIGGIN

&

john Langmore

 

 

Langmore, J. and Quiggin, J. (1995), 'Work For All - Reply', Agenda


In a recent review article, Valentine (1995), claims to offer 'a consumers' guide to recent critiques of economics', one of which is Work for All, by Langmore and Quiggin (1994). Our book is about economic policies for a return to full employment. It is not and does not pretend to be a critique of economics. However, in order to assist potential consumers, we have decided to respond.

Valentine's opening paragraph is worth quoting in full. He says

At the core of all three books is a critique of economics. In some cases (such as Langmore and Quiggin) the criticism is directed towards 'rational economics', but this term seems to denote no more than the application of mainstream economic theory to policy questions. The authors use the word 'rational' in a pejorative sense, apparently because it evokes the impressions of such horrors as expenditure cuts and reductions in employment. In the remainder of this review the adjective is dropped and the term 'economics' is employed alone. (Quotation marks in original)

All this is very impressive, and would be more so if it were not based on a figment of Valentine's imagination. We never mention the term 'rational economics' in Work for All, and use the word 'rational' exclusively in a positive sense. Valentine appears to believe that, because we refer to other people's use (both favorable and pejorative) of the term 'economic rationalism', it is acceptable practice to fabricate quotes in order to represent us as not only as critics of 'rational economics', but as being frightened of the very word 'rational'. While unconventional in academic terms, this treatment of textual evidence is quite consistent with Valentine's attitude towards inconvenient empirical evidence.

For the record, this is what we say about economic rationalism (p 42)

The term 'economic rationalism' first entered the Australian lexicon in the period of the Whitlam government and was used primarily in a positive sense. The connotation was that of policy formulation on the basis of rational analysis, as opposed to tradition, emotion and prejudice. With the exception of support for free trade, there was no presumption in favour of particular policy positions. Views were generally in the economic mainstream of the period.

We make it quite clear that we support the rational application of mainstream economics to policy formulation. Precisely for this reason, and because many people still use the term 'economic rationalism' in the sense described above, we reject it as an appropriate description of the body of economic and political thought we are criticising, preferring the term 'economic fundamentalism', to describe an irrational approach which invariably regards markets as operating perfectly satisfactorily, regardless of the empirical evidence, and rejects intervention in the interests of either efficiency or equity.

The problem here is more than semantic. Valentine's attempt to claim that 'economics' equals his brand of economics is a common rhetorical manoeuvre in this kind of debate. However, this manoeuvre is rarely as blatant as in Valentine's references to our work as 'non-economists' views about economic questions', and to our alleged belief that 'if economics is wrong, their own views must be right.'

Equally common, but entirely self-contradictory, is Valentine's point that our 'criticisms [of the competitive model] are not new. They have been raised and discussed in economics textbooks and courses for as long as I can remember'. This is, of course, true, and we cite such eminent economists as Keynes, Baumol, Samuelson, Meade, Tobin and Vickrey as our sources for particular arguments. But if our criticisms of economic fundamentalism are based on standard economic arguments by mainstream economists, what becomes of Valentine's claim that our position represents a rejection of mainstream economics and indeed of economics tout court? Nothing more than the fact that Valentine and his co-believers have decided that they are right and that Keynes, Baumol, Tobin and Samuelson are wrong.

According to the exigencies of his argument, Valentine shifts from defining economics as agreement with his own views to a definition that would allow Samuelson, Tobin and perhaps even Keynes into the mainstream. Exactly the same rhetorical dodge has been employed by other defenders of economic fundamentalism, such as James et al. (1993). When responding to critics such as Pusey, James et al. are at pains to deny that they adhere to a simplistic competitive model. But when they come to analyse policy issues, any deviations from perfect competition are dismissed as trivial.

A related rhetorical trick is at work when Valentine says 'Langmore and Quiggin appear to believe that [the falsity of the rational egoist model] means people do not react to economic incentives at all' (emphasis added), then goes on to point out various instances in which we recognise that incentives do matter. If the review were focused on our actual views rather than those imputed to us by Valentine, such contradictions would disappear.

Our principal crime appears to be the view that the elasticity of employment with respect to real wages is smaller than the -0.5 per cent estimated by studies such as that of Russell and Tease (1991), and is of minor relevance to policy. If this view is enough to define us out of the economics profession, what would Valentine say of Card and Krueger (1994), who find no significant impact of the minimum wage on US employment. Worse, what of the referees and editors of the American Economic Review who accepted the article for publication, or the members of the American Economic Association, who awarded Card the J.B. Clark Medal. The economics profession as defined by Valentine would be a small and select body.

Valentine says that we launch

'a vicious attack on a straw man: the suggestion that real wages should be reduced by 30 per cent. So far as I know no economist has advocated this policy. Any substantial reduction in wages would be disruptive.'

The reference to disruption is a red herring since we discuss only the long-term consequences of such a wage cut. Also, Valentine does not mention our observation (on the following page) that, while some commentators have endorsed the idea of a 30 per cent wage cut, the majority of economic fundamentalists have declined to nominate any target wage cut.

The minority who have accepted the case for specific large wage cuts include John Stone (1983), who quoted Gregory's estimate that 'to restore full employment, real wages would need to fall by about a third' and asked why Gregory and others had not 'expressed outrage that out nationally disastrous unemployment levels are allowed to persist' and John Howard and John Hewson, whose Jobsback package included cuts of more than 30 per cent in minimum youth wages. It also includes Valentine (1993), who presents a simulation claiming to show that unemployment would have been eliminated if annual real wage growth since 1964 had been cut by 0.7 per cent. The implied real wage reduction by 1995 is over 20 per cent.

Valentine criticises us for claiming that dividend imputation is 'regressive', but does not deny that our claim is true. His subsequent argument has nothing to do with tax incidence, but is simply a reiteration of the standard efficiency case for imputation. The question of whether any efficiency benefits justify the adverse income distributional effects is not even addressed. This is simply confirmation of our claim that economic fundamentalists are unconcerned with equity, at least as the term is used in mainstream economics.

On financial deregulation, Valentine claims that it is as inappropriate to examine movements in bank margins as a guide to the benefits of deregulation as it would be to examine the profitability of BHP on the basis of margins between input and output prices, since such a comparison 'ignores other costs'. We, along with other mainstream economists who have debated the issue, would suggest that the critical issue is precisely that of movements in costs, and that profitability is a side issue. The whole basis of deregulation was that competition would lead to efficiency gains and therefore to cost reductions. However, if profitability is the issue, it is disingenuous to quote the 1991 Report of the Martin Committee as evidence of declining profits. Surely Valentine is aware that in the period since 1991, a number of banks have reported record profits.

In summary, Valentine's main argument is based on invented quotes and on a wilful or reckless misrepresentation of our position. His attempt to claim sole ownership of the term 'economics' for himself and his clique is arrogance that is not backed up by performance. His specific criticisms of our work are sloppy and inaccurate. Consumers who want to decide for themselves, and to see what has called forth this kind of attack, should read our book.

 

References

 

Card, D. and Krueger, A. (1994), Minimum wages and employment: A case study of the fast food industry in New Jersey and Pennsylvania, American Economic Review , 84(4), 772-93.

James, C., Jones, C., and Norton, A. (eds) (1993), A Defence of Economic Rationalism, St Leonards, N.S.W. Allen & Unwin.

Russell, B., and Tease, W., (1991), Employment, output and real wages, Economic Record , 67(2).

Valentine, T. (1993), 'The sources of unemployment: a simple econometric analysis', Economic Papers, 12(4), 21-31.


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