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Wait, What Does This Actually Mean?

Vrshank Ravi '19, Staff Writer

· Vrshank Ravi

One of the more disturbing aspects about learning economics is how some terminology in the field grossly underplays the pernicious effects of using those terms. The increasing complexity of mathematics in upper level and graduate economics brings an additional layer of sophistication and abstraction, but the intuition of basic concepts from introductory courses is left relatively unquestioned in the process. For example, this journal paper (from a Professor teaching microeconomics at Hopkins) reviews how consumers make choices, but the philosophical framework of how people make decisions is not rooted in empirical analysis. Instead, it relies on theoretical models and mathematical proofs. It is critical to understand the assumptions used to think about the world in introductory courses and flesh out their origins and implications. A failure in doing so can have dangerous consequences.

Let’s start with the phrase “competitive advantage." We all learned the case of two countries looking to collectively maximize production of their respective commodities – say, corn and wheat. A country has a competitive advantage over the other in the production of corn if one country can produce corn without sacrificing wheat production as much. It is not that competitive advantage does not exist – it very much figures into understanding how the capitalist world economy works. However, we don’t dig into why a country may possess this competitive advantage. We may say that one country is just simply more efficient at producing that good because of factors like a more skilled workforce or as a consequence of geography. A country may have soil better suited to growing that crop. In the real world, competitiveness often refers specifically to “wage competitiveness.” This centers on how low the wage is for a given amount of work. With differences in exchange rates and purchasing power between countries, the nominal labor costs can differ significantly from country to country. The lower the costs spent on labor, the more profits a firm can make, and thus, the more lucrative it is for investment.

Labor competitiveness is seen by markets as a virtue. On the flipside, concerns about rising wages for ordinary workers is a plausible factor in why the stock markets tanked a few weeks ago. Increasing labor costs are also why companies get their future investment scenarios downgraded and see a fall in their valuations. Both of these are because increasing labor costs (manifested as rising wages) decreases the profitability of firms, which makes wealthy entrepreneurs less likely to invest in the future as they may not gain satisfactory returns on their investments. This aspect of competitiveness should make any economics student uneasy when using the term and what it implies for the vast majority of workers involved in adding value to a product. If we are told that capitalism is virtuous because it rewards the right people, then it only rewards the small proportion of wealthy private individuals who can accumulate capital and use it for future investment. It does not pay heed to the workers who are intimately involved in making the final product. If the a firm offers wage increases, the market rewards the this firm with less investment and poorer future prospects.

Another phrase is “flexible labor markets." Flexibility here refers to how easy it is to get workers to accept lower wages or adjust to job losses. The moral and social costs of unemployment may be devastating, but investment by wealthy individuals is affected by the business environment they work in – and workers resisting change is bad for business. If the workforce organizes to demand better conditions or material benefits from their employers, then they get threatened to have their jobs outsourced to Mexico or Bangladesh. Thinking about labor markets as a disposable race to the bottom gives us questionable opinions like this from Vox’s Matt Yglesias (then working for Slate) on how the decision to move to and work in unsafe factories in Bangladesh was a voluntary choice made by willing actors. I don’t suppose Matt has been down to Dhaka to ask around if garment workers like their suicide-net factories built to abysmal safety standards.

In conclusion, one should also discuss how the free market is perceived to be completely non-coercive institution, specifically in how consumers make choices and honor decisions, and is free from the hand of the state. Firstly, it is not clear how the contemporary world order was set up to be this way without either economic soft power via structural adjustment policies, or even military coups in places which resisted change to suit the world market. But even in a more basic sense, why would you pay a store the quoted price for the product instead of shoplifting? It is because you understand the threat of an armed Baltimore cop – who supposedly reinforces the “voluntary” nature of the transaction. If you don’t pay off your loans, expect to get your paycheck deducted before it gets to you. Or have your assets seized and homes foreclosed.

If there is such little understanding of the terms and assumptions that are frequently used, it could be because of what follows an undergraduate degree in Economics doesn’t require you to engage with these concepts in a sociological setting – it is perfectly fine for you to get a PhD in the subject without really knowing the implications of the terms that you use. Graduate schools in economics do not require expertise in social theory and psychology, but emphasize  mathematics courses in real analysis and optimization. This emphasis is telling of where the priorities lie in training future researchers in a field that purports to explain the totality of human action.

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