Is economics really ''values free'', asks Peter Lyons.
I was recently asked by a former colleague to give a presentation on ethics and economics.
I asked if he wanted two separate presentations. He laughed and said, ''just make it up, like most economists''.
Modern economics taught in our schools and universities prides itself on being ''values free''.
It aspires to be a pure science such as physics. This was not always the case. Early classical economists such as Adam Smith were arguing for improvements in the status quo.
Smith, the father of modern economics, was arguing against the system of mercantilism that dominated policy in England in the 18th century. This system favoured powerful vested interests, particularly those granted monopoly power by the Crown, entitling them to rort their fellow citizens.
Back then, it was the East India Company rather than Sky City Entertainment. There is little economic history taught in our schools or universities these days. This seems based on the premise that current theory has solved the major economic issues.
This is despite the occasional global financial meltdown, rising income inequalities and major environmental concerns. This disdain for the historical evolution of ideas in economics suggests an unwarranted faith in the validity of current theory. I teach mainstream market economics to my students on a daily basis.
I teach them that a free market is based on many firms competing to meet consumer demand. These firms are price takers.
The pressures of competition ensure that they are efficient in their production and in meeting consumer demand. The consumer is king. Often, a student will ask me to point to a market in New Zealand that meets this ideal.
I suggest the market for onions. This model of free markets is generally taught as the norm in most undergraduate economics courses and textbooks.
Imperfect markets such as monopolies or oligopolies are taught as a deviation from this norm. Yet in a small country like New Zealand these imperfect markets are the norm.
Think of markets as diverse as electricity, telecommunications, building materials, supermarkets, petrol and banking. The reality is that most markets in New Zealand are far removed from this economic ideal based on competitive pressures ensuring efficient and fair outcomes for consumers.
Yet our regulatory approach over the past few decades has been based on this ideal. I teach my students about the market for labour. According to the theory, wages in different occupations are determined by the demand and supply of workers in that industry. Firms compete for workers and workers compete for jobs.
There is no power imbalance. This ensures that workers are paid according to their value added. Unions distort this process through collective bargaining.
No mention is ever made of how professional bodies for lawyers, accountants or doctors perform a similar function by tightly restricting entry to their ranks.
They are unions for those with degrees. A bright student may ask if this model explains why CEOs are paid so much these days. According to the theory, their exorbitant pay packages are simply the product of market forces.
There seems little point in confusing the issue by talking about the cozy arrangements that often exist between a small network of company directors and CEOs in mutually determining their appointments and salary packages. I teach my students that a nation's prosperity is determined by its real GDP per capita which is referred to as the standard of living.
This measure of national wellbeing emerged in the 1930s. It has become the holy grail for politicians and policy makers. It is the ultimate scorecard of national wellbeing. It measures the ability of a nation to convert its resources into final goods and services.
What it doesn't measure is any environmental or social costs involved in achieving this goal. If global warming is a reality then the relevance of this narrow scorecard of prosperity may prove a sick joke that contributed to the demise of our species.
I sometimes reflect what it would have been like teaching economics in the former Soviet Union. It can't have been pleasant teaching Marxist dogma on a daily basis.
I am very fortunate to be teaching ''values free'' economics rather than ideology.
Peter Lyons teaches economics at Saint Peters College in Auckland and has written several economics textbooks.
