Mankiw’s Principles of Economics Part 2: The Cost of Something Is What You Give Up To Get It

The introduction to this series is here.
Part 1 is here.

Mankiw’s second principle is The Cost of Something Is What You Give Up To Get It. Mankiw explains that you have to include opportunity costs in your calculations. His example is college: the actual cost of going to college includes tuition, but not necessarily all of the costs of room and board, because you need food and a place to sleep whether or not you go to college. It also includes the money you didn’t earn by going to work instead of going to college.

Before I read Mankiw’s explanation, I thought we were going to get a discussion of the way an economist might calculate costs. That was not to be. Maybe I have to buy his Principles of Microeconomics. In the express language Mankiw chooses, you are the sole standard for calculating costs. That kind of calculation fits perfectly with the neoliberal canon of Philip Mirowski. It’s part of Number 6: Thou Shalt Become The Manager Of Thyself for sure, and it complements Number 3: Thou Shalt Worship “Spontaneous Order”, meaning the market.

Again, non-specialist students will likely remember the principle, and will repeat it mindlessly when talking about value and cost, even though this discussion doesn’t include value or even price. This is a license to ignore all the costs that are not visited upon the neoliberal You. Smoking may not make you sick, but smoking makes some people sick directly and others indirectly. The neoliberal You hopefully doesn’t pay those costs, so they aren’t included in the calculations of the neoliberal You. Computers have a number of components that are dangerous to the health of people. Those costs aren’t paid by the neoliberal You, so they aren’t included in the calculation of costs. Coal burning is a major contributor to climate change, but maybe those costs won’t be paid by the neoliberal You, so they don’t count.

Well, perhaps that wasn’t Mankiw’s intent. He does discuss externalities as something government can correct maybe, sometimes, after a fashion, and at a cost to efficiency. The notion of opportunity costs arises directly from Principle 1: People Face Trade-offs. Most likely the only point of the second principle is to make sure there a nice round ten.

Notre Dame undergrad (math); JD, Indiana University at Bloomington; 1st Lieutenant, US Army.; private practice in corporate and securities law; Assistant AG in Tennessee for consumer protection and securities; Blue Sky Securities Commissioner, Tennessee; private practice, bankruptcy and corporate law.

I have had a lifelong interest in economics. For most of my career, that interest was practical, focused on the problems in front of me. Lately I have been more interested in economics as a theory, especially its impact on the lives of people like those I met in my bankruptcy practice, and on the politics of money in the US. I also enjoy reading philosophers, starting in college and steadily expanding my reading ever since. I wrote at FireDogLake for a number of years.

Generally, I think the problem facing the US is the dominance of neoliberal discourse. I think it clouds the vision, and limits the kinds of problems that can be identified and solved. For example, the existence and danger of climate change can easily be identified in a scientific discussion. However, the problem does not fit the neoliberal discourse because science insists that the pursuit of individual and corporate self-interest will lead to devastation. In neoliberal discourse, the pursuit of self-interest always leads to Eden.

The neoliberal project has two prongs. One is the police function of crushing dissent and alternative views. The police function is provided by government agencies and private and institutional actors. The counterpart is the economic system , which is operated by government and by private and institutional actors. Some of these actors operate in both spheres. I focus on the second prong.

4 replies
  1. TarheelDem says:

    Neoliberalism depends on the strategy of externalizing as many costs as possible — from the firm’s balance sheet to government, local communities (the commons), to employees, to customers, to vendors, to creditors — in order to maximize the money that the entrepreneur/CEO/major partners/…. can take out of the firm and convert to personal wealth. Most business models are about how to externalize costs, not how to create engineering efficiencies (IMHO there are no other kind). And that externalization hides them from the balance sheet because of the difficulty of calculating them under GAAP. Fifty years of trying to create ecological-economic accounting has come no closer to handling externalities or costing them. All requires huge sets of assumptions.

    The legal concept that pairs with “cost” is “consideration”, or what is the contractual “cost”.

    That entire conceptual framework is looking kind of bare as far as generating insights into how an economy operates.

  2. Bay State Librul says:

    The gig is up?
    ———
    The economy is a dynamo, as this Business Insider article reveals

    ———-
    The gig, or on-demand, economy is the new favorite business model coming out of Silicon Valley.
    —–
    It is relevant to companies such as Uber, which streamlines work for its drivers and takes a cut of their fares but lets them work on their own schedule.
    —–
    It’s a little bit like a blend between the regular employment model and the freelancer model.
    —-
    Whether we like it or not, the gig economy seems to be everywhere. More and more Americans are turning to this semi-freelance way of making a living.

    A study from the software company Intuit a few years ago estimated that as much as 40% of the American workforce could be freelancers, independent contractors, or consultants by the year 2020. It’s a major, major economic shift.

    —-

    The New York Times reported that the director of the Freelancers Union, which advocates independent contractors, “puts the scale of the dislocation on a par with that caused by the spread of railroads before and after the Civil War and the boom in the mass production of goods during the early 20th century.”

    —-

    Today’s economy isn’t set up to deal with this kind of disruption. Policy, so far, has not addressed it. That Clinton addressed the issue in her speech gives the issue a spotlight and legitimacy, the first step forward.

    ——

    “This on-demand or so-called gig economy is creating exciting opportunities and unleashing innovation, but it’s also raising hard questions about workplace protection and what a good job will look like in the future,” she said at the New School in Manhattan on Monday.

    —–

    So, why is the gig economy a problem?

    ———

    First off, it’s expensive for its workers. What independent contractors gain in flexibility, they lose in benefits. Employment taxes are higher, healthcare is more expensive, and 401(k)s (let alone pensions) don’t exist for people who freelance. Even if freelancers get paid the same amount as they would at a regular job, they still have a lot less left over to drive the consumer spending that makes up 70% of the American gross domestic product.

    ——

    We need to be worried about this. Nearly everyone in America outside the top 10% of the income scale has seen incomes fall since 2007.
    —-
    A recent article by Nick Hanauer and David Rolf in Democracy Journal calls this new kind of economy “an economic transformation that promises new efficiencies and greater flexibility for ’employers’ and ’employees’ alike, but which threatens to undermine the very foundation upon which middle-class America was built.”
    —-

    Like it or not, addressing the gig economy head on will have to be part of the solution. Monday’s speech was a first step. That said, while Clinton raised the issue, she still hasn’t laid out a plan for what should be done

  3. Alan says:

    Mirowski’s #6 draws heavily on Foucault’s discussion of the self in The Birth of Biopolitics (see Chapter 9 onwards). Classical  economics has very little in the way of analysis of labor. Neoliberalism, see in particular the work does a whole analysis of labor. The focus isn’t on wages, employment, or profit, but how persons make choices and develop their capital, or not (see Gary Becker).  Persons in neoliberal thinking are not merely partners in exchange relationships but, what Foucault refers to as, “entrepreneurs of the self”. People themselves are commodities, and come to experience themselves as commodities,  they produce and market their selves. In classic liberal theory one participates in various spheres of life: marriage, family, church, government, etc. with their own types of relationships and… market activities. In neoliberalism everything is a market activity, including the self, and all relationships are market relationships. As I’ve noted before, it’s a form of totalitarianism. It’s about who you are, how one thinks of one’s self, and how you experience one’s existence. When neoliberals talk about ‘freedom’ they mean persons are rational utility maximizing beings that are ‘free’ to act in a field of market relationships.  And the latter are enforced by an authoritarian state that imposes the relationships everywhere (as Mirowski notes, “A primary ambition of the neoliberal project is to redefine the shape and functions of the state, not to destroy it.” And note that Hayek drew extensively on the anti-liberal political philosopher, Carl Schmitt.) There is nothing outside of market relationships. There is no other value but market values. And for the many who are now the products of educational institutions that have themselves been bent to neoliberal relationships and modes of thought (see Terry Eagleton’s witty Slow Death of the University) it may hard imagining any other form of relationship or value.
    *
    By the way following on from the paradigm discussion again and the expansion of neoclassical economics into a theory of everything, see Edward P. Lazear. Economic Imperialism. Quarterly Journal of Economics 115:1 (February 2000): 99-146. Anyone with some education in the social sciences and philosophy might be tempted to howl with laughter if it weren’t for the fact that these sort of people are running the show and either exterminating or colonizing alternative thinking (see Eagleton above). The author of this particular tract was the chief economic adviser to President George W. Bush.
    *
    One of the things Foucault is doing is subverting the construction of modern human subjectivities  i.e. exposing their historical contingency so one can think outside them. He’s subverting the grip, of dominant sets of ideas and practices (paradigms, epistemes, forms of life, …), to make space for the possibility of resistance.  This is again why Mirowski’s point about noticing the reversals is important. It subverts the neoliberal myths of essence, continuity and progress. Mirowski’s writings on neoliberalism are an endless cataloging of contradictions and violent impositions. Also see Foucault’s essay, Nietzsche, Genealogy, History.

  4. Alan says:

    I suspect Mankiw, like most neoclassical economists, doesn’t understand externalities and transaction costs. But maybe we shouldn’t get ahead as I believe this will come up in the discussion of principles 6 and 7, in which he mangles both Adam Smith and Ronald Coase.

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