Teaching Taxes

micro-econ-taxes

Ahhhh!!! Graphs! Runaway! Yeah I know, but bear with me for a second. This isn’t meant to be a quantitative post. This is meant so that we may comprehend the scale of a problem with public perception in economics that has largely gone ignored by the members of my field for too long.

“Economics is a legitimate social science, not subjective ideology.”

I start however with the recent wave of STEM education promotion which has been truly awesome to behold and incredibly beneficial for our society. Speaking personally, I would have been far less likely to have pursued my undergraduate in engineering if I hadn’t spent all those hours as a child watching Bill Nye. In fact, that’s exactly what I told him when I met him last year. By no means to take away from this trend though, perhaps the biggest insight economically speaking from this recent political season is regarding the public’s perspective of economics.

Before we get into distinguishing right from wrong though let us at least agree on this, economics is a legitimate social science, not subjective ideology. In physics when we drop an object and it falls we acknowledge the existence of gravity. Similarly in economics there are certain known facts and relationships that have been studied and proven by economists for centuries.

Unfortunately however, this is not how economics is often viewed in the public sphere where economic principles are often based on little more than “old wives tales” and the regurgitation of political platforms. I truly believe if we were to simply wipe the slate clean and were all capable of looking at problems objectively with critical reasoning and discussing solutions based on sound economic foundations and research, politics would not have the same ugly partisan connotations that it does today. A shameless promotion for my blog there.

More to the point though, where do we start? How about with education, where we still have some work to do. At my University there are 12 different undergraduate majors which require an economics sequence or course. Many of these students will go off to find careers in business or public service leadership and very likely will come to help mold the future public mindset on economics. Because these are largely introductory type courses however, they only provide the most concise tools and philosophies possible to gain an understanding of economics.

A most prominent example is regarding taxes. The reason I present the graph above is because it visually depicts how a standard undergraduate microeconomics course would teach students about how taxes affect the market. In summary, the basic concept is that imposing a tax “hurts” both consumers and producers and reduces the amount of trade in the market.

The trouble is, this greatly oversimplifies the study of tax policy and is incredibly misleading. Unfortunately though each year thousands of students walk away from universities across this country with a bachelors or even an MPA or MBA thinking that’s all there is to it. It completely disregards the notions of cost-benefit analysis, tax incentives and disincentives, efficiency, or even how government is funded for that matter. Yes, deadweight losses do exist. Imposing a tax does theoretically affect that market interaction negatively, but to leave it at that is quite frankly dangerous.

I make sure that with every student I meet with to at least be mention the fact that in reality there are trade-offs and that the specific circumstances and surrounding research matters. Taxes can be used as a disincentive as with tobacco. There are taxes which we would consider vital to our current way of life like Social Security taxes. Some taxes can be used to help regulate against externalities such as a carbon-tax. There are plenty of exceptions when it comes to tax policy where a simple DWL analysis does not tell the entire story. If we are going to start reshaping the public perception of economics then we must start by making sure our future economic thought leaders are walking away from their education with a sound understanding of the complexities of economics, and a respect for the study as the social science that it is.

Advertisements

The Theory of the Firm: If Economics & Entrepreneurship Would Converse

Richard Stallman is largely considered the "founder" of open source software.

Richard Stallman is largely considered the “founder” of open source software. “Richard Matthew Stallman. Digital image. Wikipedia.org. Wikipedia Foundation Inc., n.d. Web.”

Given my background, I very often tend to straddle the line between economics and entrepreneurial literature. Even if one had little to no background in either field however, it requires relatively little thought or observation to discover how married at the hip these two fields truly are. Indeed in entry level microeconomics courses  we are taught about the theory of the firm. Various definitions of this exist and it has certainly evolved overtime of course. Interpretations range from such austere neoclassical concepts as “that firms exist and make decisions purely to maximize profits (or shareholder wealth)” to more modern ideas which add to that concepts of long and short term aims, corporate responsibility, innovation, etc. though most of those are found in industrial organization or business oriented scholarship.

Why the neoclassical (read as ~ pre-WWI) ideas are rarely accepted in their unbridled form probably should come as no surprise. Few theories that old in any field of scholarship are still accepted in their pure form today. The story of how that came to be is largely attributed to the works of John Maynard Keynes (1883 – 1946) and his post WWI economic proposals. More to the point, observation of how firms’ behavior are beginning to evolve today (key word = evolve) often runs in stark contrast to many of today’s well-accepted theories of firm behavior let alone those of old.

While the definition of “entrepreneurship” is fairly contested even within the field of research, if we consider entrepreneurship in the context of scholarship as at least incorporating the study of how individuals and firms innovate and evolve in the marketplace, then it has the potential to offer key insights into the theory of the firm. What is missing from the conversation in economics, though it is beginning to foster more discussion in entrepreneurial fields, are the behavioral changes and corresponding firm/entrepreneur motivations which stand almost as a 4th dimension to the 3D world of neoclassical thought.

If we accept the traditional theories as a universal truth, then what on Earth causes any entrepreneur to form a Benefit Corporation or B-Corp? Who in their right mind would take the time to create Wikipedia, let alone Wikileaks? What interest does homo economicus or a wealth maximizing firm have to create Bitcoin?  How can open source software, which provides a crystal clear opportunity for profit generation, possibly exist in a free market? Speak with almost any entrepreneur in renewable energy and the words “profit” or “wealth” are rarely uttered while “climate change” and other socially oriented value concepts dominate the conversation. Why do so many local microbreweries and cafes which are axiomatically in competition with one-another,  assist each other in forming their businesses? Why do some business owners, with little to no market incentive to do so, purposefully locate their manufacturing to more costly, higher wage, countries? How do companies on Kickstarter generate such activity? Why would health clinics form in the developing world which charge affluent customers for medical services then turn around those profits to provide free health care to the poor? While some may find ways to argue their place in traditional economic theories, in truth these ideas mesh with neoclassical economics no more than Noah’s Ark meshes with Geology. As is seen time and time again throughout history, rather than simply observe these phenomena those that feel they challenge established theory instead very poorly try to explain them using conventional wisdom.

So what does this imply exactly? The answer to that, is probably the most exciting takeaway one can get from reading research literature or blog posts for that matter. We simply do not know yet. How cool is that!? These concepts continue to evolve into our modern economy and economists, entrepreneurial scholars, and other academics are yet to fully analyze and understand them, let alone model them. Keep an eye on the forefront of economic research because while most people today emphasize sovereign debt, China’s inward shift, oil prices, and automotive sales, in the coming decades, I believe this field of economic research will begin to change the way we view and operate within the economy altogether.

GDP vs. True Societal Success

GDP Definition

Gross Domestic Product (GDP for short) for those unfamiliar or just wondering about the specifics of its use, is the “The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis.” Mathematically:

GDP = C + G + I + NX

Where “C” is equal to all private consumption, or consumer spending, in a nation’s economy, “G” is the sum of government spending, “I” is the sum of all the country’s businesses spending on capital, and “NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports)”

GDP is seen as a macroeconomic indicator, a performance metric if you will used to compare total activity in a nation’s economy over time. You’ll often hear GDP figures in news report for this reason as its often the most salient indicator used by economists, the finance industry, politicians, etc. to judge the “health” of the economy.

Historical use of GDP

Like so many aspects of US culture and political policy, GDP, or Gross National Product (GNP) as what was used then, is largely a carry over of prewar and WWII era America. Not until Black Tuesday was our government ever in such a need to constantly measure the health and growth status of the national economy. The nation needed to get back on its feet from the depression meanwhile transitioning itself into a well oiled war machine to fight off our enemies in Europe. GNP offered the most comprehensive and effective way to measure our economic resurgence and defer resources to the war effort abroad.

Post Keynesian economic expansion and WWII, GNP was suddenly found to be fantastic comparative tool with the Soviet Union, which itself utilized Gross Social Product and Total Gross Output of Industries, until 1988 when it formally adopted the compilation of GNP statistics. Not until 1991 was GNP out-shined by GDP, which then took great international prominence during the 90’s economic boom.

Overall, GDP and GNP have played an instrumental role in our economy since the 1930’s. The creation of such a powerful and salient metric at economists and policy makers disposal, proved to really bring about an econometric revolution. While economic policy is nevertheless highly politicized, GDP was a profound catalyst in establishing the highly analyzed and quantitatively measured world of economics we now live in. In the 1950’s GDP “led to the development of official ‘input–output’ tables, capital stock estimates, and more detailed local personal income estimates. In the 1970s, accelerating inflation prompted the introduction of new measures of prices and inflation-adjusted output. In the 1980s, the internationalization of trade in services led to an expansion of this component into the calculation of national income.” (AtKisson 2013) We now have a greater ability to analyze the results of policy changes rather than theorize and fall back on political rhetoric to defend positions. It is arguably one of the more important economic advances in history.

The use of GDP however, is not without its negative consequences or sweeping assumptions of course. Economic discussions and analysis in the media rarely include the various subcultures and divisions of labor. We now focus on “producers” and”consumers” which many argue has lead substantially to the largely materialistic culture of today. It has also encouraged an economic trend dubbed by President Eisenhower as the “Military Industrial Complex”, where a substantial portion of the economy is now dependent upon military spending.  There is a profusion of discussion relating to the dangers of an over-reliance on GDP and its short coming.  Of greater relevance here is that GDP makes an inherent and somewhat audacious assumption that consumption is the true driver of prosperity. Is this necessarily the case however?

GDP vs. Happiness

As wonderful as GDP has proven historically speaking to demonstrate economic health,  let us not forget that much like any other aspect of human civilization (culture, social acceptance, technology, etc.) , our economy has likewise evolved and should now serve a higher purpose. The original intent of an economy was to serve as an organized system of exchanges and divisions of labor which individuals contributed to and drew resources from to provide for their basic human needs. As Adam Smith, author of An Inquiry into the Nature and Causes of the Wealth of Nations, once said “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

Today however, an economy is more than a system of production and consumption but rather, a way of organizing a society itself whereby government plays an important role as a check on markets and to serve the needs which markets cannot (creating and enforcing laws for instance). In today’s world, we expect more than to simply have our lower level physiological needs met. We strive for ideas even higher up the chain of Maslow’s Hierarchy. This is where GDP has its short fall as I think was summarized well by then Presidential candidate Robert Kennedy’s remarks at the University of Kansas on March 18 1968.

Just as in any form of management, it’s important we as a society step back every once in a while and examine ourselves, our current path, and the ways in which manage ourselves chiefly our government and our economy. Pertaining to the later, how does our current economic system perform relative to many consider the only goal of life which is itself not a means to an end, happiness?

“And of this nature Happiness is mostly thought to be, for this we choose always for its own sake, and never with a view to anything further: whereas honor, pleasure, intellect, in fact every excellence we choose for their own sakes, it is true, but we choose them also with a view to happiness, conceiving that through their instrumentality we shall be happy: but no man chooses happiness with a view to them, nor in fact with a view to any other thing whatsoever.” – Aristotle

There have been a number of attempts in recent years to represent GDP vs. Happiness (or some metric designed to capture happiness/life satisfaction). Many of the most credible of these findings tend to illustrate fairly minimal correlations compared to what many economists expect. In 2011, the US was by far the worlds largest economy by GDP yet ranked 31st in the Quality of Life Index (QLI), and 29th in Mercer’s Quality of Living Survey. Even the Economist has demonstrated a fairly minimal relationship. Their results went as far as to gauge Mean Life Satisfaction versus GDP per capita at PPP (Purchase Power Parity). Only until plots are done in logarithmic scale does it approach anything near liner which by definition would indicate an exponential relationship between the two.

The Economist. Rep. The Economist Newspaper, 25 Nov. 2010. Web. 13 July 2015.

The Economist. Rep. The Economist Newspaper, 25 Nov. 2010. Web. 13 July 2015.

Although there are certain arguments to be made to the contrary and disputes are inevitable in any social scientific discussion, GDP as the reigning global economic indicator still stands despite its many critics. This then begs the question, if the relationship, while certainly present, appears fairly weak between the two, perhaps our idea of success should strive to be more comprehensive?

Social Success Metrics

The small Southeast Asian nation of Bhutan thinks so. In 1972 they actually went so far as to implement a new measure called Gross National Happiness (GNH), which still carries forward to this day, albeit with a few revisions. While my colleague Griffin Kearney and I felt GNH represents a fantastic starting point, it leaves much to be desired from a free market, democratic, and analytical perspective to truly serve well as a comprehensive indicator.

In keeping with these mathematical and philosophical constructs and as part of a greater research proposal we’ve been developing, spawned 6 key social success metric concepts, each design to represent a specific scope of societal success.

  • Wealth
  • Health
  • Safety/Security
  • Social Capital
  • Education
  • Freedom

Inspired by the Legatum Prosperity Index, it is our intent to develop a more concise grouping of economic based metrics designed to be analyzed by economic researchers and policy makers as a set. The individual metrics will themselves be made of indicating measures that have already been fairly well established in their respective fields. It is our intention that the inherent propinquity of the grouping of these metrics will inspire unique affiliations and a more cohesive societal aim. Keep tuned for developments on the specifics of these metrics on the My Current Research page.

While there is much still to be discovered about the best individual metrics best suited for this grouping, the methodology behind the grouping itself still stand. Much like the grouping of Maxwell’s equations, the foundation of each of these metrics is by and large well established independently but conceivably, when put into a greater, high-order context, they can have new meanings, interpretations, and inspire a greater connectivity. If it is our life’s aim to be: wealthy, healthy, safe, socially prosperous, educated, and free, perhaps that should be the new measure by which we judge ourselves then.

 

 

References:

  • “Gross Domestic Product (GDP) Definition | Investopedia.” Investopedia. N.p., 19 Nov. 2003. Web. 13 July 2015.
  • AtKisson, Alan. “Chapter 1 The History of GDP: From Crisis to Crisis.” Gross Domestic Problem : The Politics behind the World’s Most Powerful Number. N.p.: Zed, 2013. N. pag. Print.
  • Burton, Neel. “Aristotle on Happiness.” Psychology Today. N.p., n.d. Web. 13 July 2015.
  • “Money Can’t Buy Happiness – or Can It?” The Economist. The Economist Newspaper, 30 Nov. 2010. Web. 13 July 2015.
  • “Money and Happiness.” The Economist. The Economist Newspaper, 25 Nov. 2010. Web. 13 July 2015.
  • Rothkopf, David J. “Redefining the Meaning of No. 1.” The New York Times. The New York Times, 08 Oct. 2011. Web. 13 July 2015.
  • Frey, Bruno S. Happiness: A Revolution in Economics. Cambridge, MA: MIT, 2008. Print.
  • “The 2014 Legatum Prosperity Index.” Prosperity Index 2014. The Legatum Institute Foundation, n.d. Web. 31 May 2015. http://www.prosperity.com/#!/explore-data?opts=2Ekxmx-UmA2y1

Thinking Middle or Thinking Mathematically?

Sweishness 2

Thinking “Middle”

Slide1.jpg

Thinking “Mathematically”

 

 

 

 

 

 

 

I have to give Dr. Jordan Ellenberg the credit for this example from his wonderful new book How Not to be Wrong.  What Ellenberg poses is a fantastic bit of, in essence mathematical philosophy, which illustrates a perfect example of what this blog is all about, objectivity, logic, and critical thinking. The idea of simply associating “good” or “bad” to ideas even subconsciously, is an extremely dangerous way of thinking. “Dangerous” in this case meaning it’s very easy to make a mistake or assume a position on the surface one would otherwise later find they disagree with.

The typical political mindset is represented by the graph to the left. “Swedishness” in this instance referring essentially to liberalism. The graph is constructed arbitrarily for someone who associates themselves politically conservative but would represent the inverse for someone who associates more liberally. Regardless, this would illustrate a “less government is good so even less must be better” ideology. Well clearly this purely linear relationship to government would never hold true otherwise, the most effective way of doing things would be to eliminate government all together, declare Marshall law, and god speed to those without an AR-15. Conversely, a lock-down Marxist dictatorship never works either, as evident by numerous government overthrows throughout human history.

At this point, I’d like to state once again, that most of partisanship is no way an indication of how anyone necessarily consciously believes. Most of what we’re talking about here is how partisanship is largely illustrated by subconscious behavior and actions. In fact, once one does give an issue some thought, positions are more thoroughly vetted and openly discussed, the vast majority of Americans true beliefs rarely fall into either partisan category.

Regardless of whichever, if any, camp that one falls into politically, after this further discussion takes place there’s the clear indication that linearity is just simply not representative of the way nature works. Nature is a constant battle for balance, equilibrium, and homeostasis. Too much or too little of anything can be dangerous and retrogressive. The reality of  nature is represented by thinking Mathermatically, and that make sense doesn’t it? Is that not in essence the purpose of math in the first place, to relate our actions and understanding of how the world works through a common language?

The key difference here is finding the distinction within the vast overlap between thinking Middle and thinking Mathematically. Thinking in the Middle means finding a compromise within each side’s position. It’s labeling energy policy as “Energy Security” rather than “Sustainability”, it’s advocating for “economic growth” rather than “responsible economic policy”. Thinking Mathematically is about turning a blind eye to the very concept of political bias in order to be fully objective, to be empirical in one’s approach, to question one’s results and assumptions, to place the logic for societal freedom over the avarice of personal preference. To think Mathematically requires that one starts with no preconceived notions of outcomes, without grouping one’s self into a particular predetermined mindset or group. It requires the we, as a society, as a community, as an ecosystem, define the very basic collective goals and shared values we have for our lives and then build policy on an objective basis from that foundation. Discussion, debate, conversation is to be encouraged, ill-supported rhetoric and hidden agendas are not.

The reason I bring all of this up is that, because so much of the bias and partisan underpinnings occur purely on the surface as mentioned earlier, much of these through processes therefore occur as a result of subconscious thought. Most advocates of political bipartisanship however, struggle because while they acknowledge this trend, they fail to recognize the implications of what that actually entails. They tend to instead fall into the category of thinking Middle. Their ideas, while well intentioned, tread along the linear portrayal of Sweedishness hoping to land the debate somewhere in the middle. They succumb to the current structural reality of partisan two party politics, praying that finding compromise, even if its largely unproductive, will at least pass some kind of legislation over gridlock.

Thinking in the Middle is one thing, but thinking, openly, objectively, logically, thinking Mathematically, that’s something else.