Pursuit of Truthiness

my gut tells me I know economics

Marx and Dilbert, Economists

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I taught Marx in my History of Thought class today and realized a few things.
One is that, about half the time I want to point a finger at Marx’s flaws, there are two fingers pointed back at the rest of economics.
For instance, Marx thought that wages would be pushed to subsistence. We could laugh at him for being wrong, but David Ricardo thought the same thing and never gets laughed at by economists. Marx thought huge firms would bump off all the little ones, but so did Schumpeter.

Marx’s writing was longer, more dense, and more mathematical that it needed to be to get the point across, and he did this partly in order to bolster his intellectual credentials so his policy and political ideas would be taken more seriously. Many modern economists do exactly the same thing.
I came up with two criticisms of Marx’s system that I think are valid, I am wondering if anyone else has read enough to know how (or if) he answered them. Most basically, he seems to be assuming that all industries exhibit increasing (or at least constant) returns to scale, which is blatantly false in the real world. Relatedly, he seems not to consider the specific inefficiencies that arise as firms get bigger: it is hard to get information about what is happening in every part of the firm and its market, and the incentives of workers and managers tend to get less and less aligned with that of the firm. This is a force pushing firms to get smaller even if the production process itself exhibits increasing returns.

This same criticism of Marx’s prediction that firms would keep growing also applies to governments trying to centrally plan: information and incentive problems will bedevil them.

On the other hand, we can partially rescue Marx in two ways on the firm size thing. One is that he got the direction of the future right even if he extrapolated too far: the next 50 years would see bigger firms and more monopolies. Also, imagine if he had been right about firm consolidation: if the efficient organization of the economy really were one huge firm, it is at least plausible that the government should heavily regulate or nationalize it.

I realized how Dilbert explains all of this. It is a classic example of how workers get alienated in big firms. But it also shows the bureaucratic forces and incentive and information problems that make big firms horribly inefficient and vulnerable to smaller competitors.

Finally, everyone should check out Joan Robinson’s hilariously condescending letter poking fun at Marxists (but not Marx) and explaining model-based thinking. Excerpt:

“When I say I understand Marx better than you, I don’t mean to say that I know the text better than you do. If you start throwing quotations at me you will have me baffled in no time. In fact, I refuse to play before you begin.

What I mean is that I have Marx in my bones and you have him in your mouth… suppose we each want to recall some tricky point in Capital, for instance the schema at the end of Volume II. What do you do? You take down the volume and look it up. What do I do? I take the back of an envelope and work it out.”

Imagine she is talking about grad school here:

“They had no time to think about the big question, or even to remember that there was a big question, because they had to keep their noses right down to the grindstone, working out the theory of the price of a cup of tea.”

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Written by James Bailey

February 4, 2013 at 9:36 am

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