Definition & Reality in the General Theory of Political Economy

by Thomas Cool

In their preface the authors refer to a list of books that spell America’s doom, and they rightly comment that “spreading the bad news has become a cottage industry” (p ix). My problem with their list of books is that it hardly contains any serious economic study. They don’t refer to Krugman (1994a, b), while stagflation is a real economic issue. Of course, if you are a victim of such ‘doom books’ then you might benefit from Cox & Alm’s exposition, but then you shouldn’t forget about the serious literature, and the authors should warn about that.

One of the reasons why the book is unbalanced is that it seems to serve two goals. On one hand the argument seems to be that America is doing well ‘on average’ (and even for the majority of the people) and on the other hand the argument seems to be that the poor are not as poor as claimed. This creates the contortion that, when it is shown that the average American home now contains many electronic gadgets, there apparently is also the suggestion that this would be true for the poor - while this certainly cannot be the case. Conversely, where it is argued that many of the legally poor actually are retired people with $300,000 valued homes, then this indeed is useful to note (and points to a possible error in America’s laws) but it doesn’t clarify anything about the working poor.

The authors intend to shake up America from a sense of doom, and the book contains a lot of hyperbole of the kind that ‘things really are OK’. The authors of course are right that there has been hyperbole about American failure. Their suggestion that this sense of doom originates from the midlife crisis of the baby boom generation, may well be true too. Cox and Alm likely are right as well that emotions with such deep psychological roots require tough counter-measures. But their argument remains unbalanced. If the penis is the problem, please stay away from economics ! Not surprisingly, they often misrepresent the real issues in the economics debate.

A positive point about the book is that it provides a number of facts on the American situation that may not be available in this conjuction elsewhere. Such facts for example concern some basic results of the University of Michigan Panel Survey on Income Dynamics, the plots of the diverging of data series on average hourly wages and total wage compensation (that includes fringe benefits such as health care), and an overview of the findings of various authors on the overestimate of the Consumer Price Index.

It is an entirely different subject how Cox and Alm use these data. About the image of doom they first suggest that ‘the argument rests’ (p4, they don’t say who gives this argument) on the hourly wage index. Then Cox and Alm come to the rescue, and show that total compensation has actually be on the rise. Gentlemen, please, this is no way to behave in a civilised discussion: (a) say who gave this argument, (b) serious economists always consider total compensation, so - especially when you write a book that mentions trivialities such as that computers get cheaper every year - also explain why your hour wage index would not include fringe benefits. (In other words, the note on p215 on ‘wage data’ does not explain much.) (c) a discussion on poverty is not about averages, (d) and it is entirely misleading to suggest that per capita income is a good indicator, for either average or the poor, since this includes the profits and interest of the capital owners.

Similarly, the Income Dynamics data show that people from the lowest 5^th quintile can migrate to the higher quintiles . OK, many students first are poor and later earn a good living. The point of the poverty debate however is that many of the poor are not students. Mutatis mutandis for others who manage to escape. And even for students one might question why they should live in poor conditions. Cox and Alm again misrepresent the issue.

Cox and Alm spend pages on illustrating the various technological improvements since the 1950’s or even the 1970’s. The argument e.g. that the PC has come about since the 1970’s, and has gone down in price enormously, is of course of little value to the poor person who cannot afford it anyway. The argument that ‘we benefit from cheaper products’ is rather contorted. Cox and Alm have a point that incorporating technological improvements is a difficult issue in statistics. Still, it is not a new point, and giving a list of gadgets is not a sufficient method to settle the price index problem either.

The authors refer to p182 to Maslow’s theory of psychological stages. The suggestion is a bit that the poor should be happy that they at least have their physiological necessities, and that self-actualisation is a luxury limited for the rich. One would hope that Maslow’s theory will be applied more critically. Even a poor person or even ‘primitive’ societies can have degrees of self-actualisation. These aspects are so much part of the definition of being ‘human’ that they do not represent a sequential order, but are relevant simultaneously, with different degrees and formats depending upon economic and social means and conventions.

Another way to look at this book is to see that it highlights many predicaments in the debate on poverty, so that it shows that the issue of poverty is not as simple as many may think - including, apparently, the authors themselves.

Cox and Alm summarised their argument in the article “Why Some Americans Want More Poverty” in the Wall Street Journal, European edition, November 10 1999. To show how convoluted some arguments are, I can usefully quote that article, and then comment on it.