Deflation, not socialist ideology, fueled trade unionism in Britain

This is what happens when my sister leaves history books lying about. In the “The Oxford History of Britain”, H.C.G. Mathew writes in the chapter on what he calls the Liberal Era (1851 – 1914) in Great Britain,

Trade union activity grew in a context which seems most curious to the post-1945 observer. The twenty years after 1874 were characterized by a sharp and substantial deflation – that is, prices (and, to a lesser extent, wages) fell. On the other hand, real wages … rose. But this was hard for trade unionists to come to terms with: a man will hardly believe that an employer who reduces his wages may still be leaving him better off. The new trade unionism was thus concerned to defend working-class wages: it was a reaction, as much as a positive force. It had little ideology except for the concept of solidarity. Some socialists played a part in the most publicized strikes of the period … But these were not typical strikes (indeed the London Dock Strike was not conducted by a union: the union was formed after the strike finished); nor should the role of the ‘socialists’ who led them, such as John Burns, be over-stressed. Even most of the trade union leadership was staunchly Gladstonian: Karl Marx and his works were virtually unknown, outside a small circle in the country where he had spent almost all his working life…

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Misunderstanding Public Goods

Via Bryan Caplan, I learned about a new paper by Frances Woolley on the difficulty of teaching the theory of “public goods”. I am very sympathetic to the paper because I feel that the term is among the most frequently misunderstood and misused terms in all economics (alongside “human capital” and “market failure”).

As I see it, the main problem with the phrase “public goods” is the strong tendency to use it synonymously with “government activities”. And I’m not only talking about how uninformed laypersons use the phrase. Even trained economists tend to see everything the government does as a solution to some public goods problem. This is a mistake. There are lots of things the government provides that are not public goods – such as education and health care services. Conversely, there are lots of public goods that are provided by private companies – think radio programs or internet search engines.

Woolley mentions that problem as well, but her main concern is that in talking about public goods we frequently mix up three distinct concepts:

  • non-rivalry: does it cost more to provide the good to two or more persons than to one?
  • non-excludability: is it feasible to exclude people from using the good?
  • public finance: who pays for the goods in what way?

To be fair to my educators at the Uni Graz, I think they did try to keep the three concepts apart. I am just not sure that every student got the message. And I think Wolley is right to point out that some of the examples textbooks use to illustrate the concept such as “law and order”, “fire protection” or “national defense” are only public goods when viewed as abstractions:

The goods and services that go into creating ‘law and order’ are not themselves pure public goods: access to the courts is rival. The explosion of gated communities and private security firms is evidence of the excludability and rivalness of police protection. Fire protection is, from a technological point of view, excludable (the fire department can refuse to put out your fire if it chooses). Coase (1974) argued that lighthouses were, historically, often privately provided and financed, and changing navigational technology is making them obsolete. Parks are partially excludable (permits are required for hiking and camping at many national parks, for example).

In light of these considerations it is pretty hard to come up with real-world examples of pure public goods – challenge for the comments section: name pure public goods. I agree, therefore, with Woolley’s plea to de-emphasize public goods in introductory economics courses and address the issues related to non-rivalry and non-excludability separately.

How to make students honest in exams

One of my favorite economists, David Friedman, suggests an economic solution to a problem that every teacher has probably faced.

In most exams, students have an incentive to respond to a question even if they do not know the answer. If they do not respond at all, they will get zero points with certainty. If they write something – anything – there is some probability that they will get at least a few points, maybe because they guessed the correct answer or because the teacher reads what he or she wants to read.

Pretending to know the answer when you don’t is an economically wasteful activity. It is a waste of time for the student as well as for the teacher who has to grade the exam. It is also, at least potentially, a distortion of the signal embodied in exam grades, because students who pretend to know might do as well on the exam as students who really know.

Friedman’s solution: Award 20 percent of the points for the response “I don’t know”. Students who know less than 20 percent or are less than 20 percent sure that they know the right answer will respond, rationally and honestly, “I don’t know”. Students who know more or are more certain of their knowledge will give their answer.

Now behavioral economists might object that students may be overconfident, i.e. they overestimate their true abilities and give an answer not because they pretend to know, but rather because they truly believe they know. However, even overconfident students – those who, for instance, put the probability that they know the right answer at 50 percent when in fact they don’t know it – might still prefer to answer “I don’t know”, because that guarantees them a certain outcome of 20 percent of the points whereas writing an response they are unsure about means risking losing all the points on the question.

Anyway, I love the solution. I think I will try it in my course. It is also a good example of how simple economics – thinking through the implications of rational behavior – helps solving a non-economic problem.