Economic illiteracy reigns supreme in Greece

Wed, 05/02/2018 - 15:20

Economic illiteracy reigns supreme in Greece



Dr. Iakovos Arapoglou

Instructor of Economics

New York College


 In my opinion, it is hardly surprising that, when it comes to economic questions, the public discourse in this country habitually reproduces certain fallacies whose roots extend far back in time and which seem to have grown ever more popular in the years of crisis. It is more surprising, however, that some of our students who should know better subscribe to those same fallacies and misconceptions. In any case, I write this note to alert our students (or at least those who care about that sort of thing) to the kind of nonsense which currently passes for conventional wisdom. In the present context the following examples must suffice.

1.            It is frequently asserted that a strong currency makes for a strong economy. In particular, so the argument goes, the exchange of one currency for another at purity (i.e., one-for-one) entails equally strong currencies, whereas if one unit of a certain currency is worth more than one unit of another the former currency is said to be stronger than the latter. This, of course, is a version of the anthropomorphic fallacy in that currency strength is defined somewhat along the lines of action movies in which the hero can take on several villains at once. Besides, it is not true that correlation does not imply causation? To illustrate, consider a frictionless world (one with zero transportation costs and no trade restrictions between countries) in which the prices of all goods expressed in the same currency must be fully equalized. If, e.g., identical wine (produced on both sides of the Atlantic) sold for 15€ in euro-land but 10€ in the US, with the exchange rate between dollar and euro at purity, nobody would ever buy European wine. Evidently, unless either the exchange rate settles at 10/15 dollars per euro or the euro cost of European wine drops to 10€, the European wine sector must cease to exist (here we take the dollar price of US wine to be constant). Obviously, what applies to wine must also apply to all goods so that, in our simplified example, the exchange rate must necessarily satisfy the equation e=P/p* (known as the PPP (Purchasing Power Parity) equation) where e=domestic currency price of foreign money, P=domestic currency price of a standard consumption basket, P*=foreign currency price of the same basket. Now suppose that some country wishes to revalue its currency to any given extent: to that effect all it needs to do is scale down the domestic price level (P) sufficiently. Thus if, say, e=300 drachmas per dollar and proud Greeks wish the drachma to attain purity with the mighty dollar they could simply reduce all prices at home (including the price of labor services) to 1/300 of its initial level (see the PPP equation above). Surely, patriotic Greeks in many wages and prices required to achieve the national objective, especially since in the resulting economic state there would be no change in anyone's living standards? (And yet Greece's monetary history in the post-1970 period shows exactly the opposite)! Indeed, though highly simplified, our example illustrates the fallacy at hand: so far from being a determinant of national wealth, power, prosperity etc. the exchange rate is ultimately determined by the underlying, fundamental economic forces of productivity and thrift. But the persistent popularity of the indicated fallacy is testimony to the unwillingness of some people to acknowledge that there are no magical solutions to economic problems.

2.            Another, quite popular claim advanced by politicians and assorted pundits is that the alleged tendency of certain groups to “take money out of the country” hurts the (Greek) economy. In particular, the pundits charge immigrant laborers with remitting part of their earnings to their country of origin which they believe to be detrimental to the host country. Now, regardless of the validity of this claim, the most striking thing about it is the conspicuous double standard involved. For not only the same pundits who denounce Albanian Immigrants for their Remittances never object when diaspora Greeks do the same; perhaps more tellingly, they do not seem perturbed by Greek consumers' pronounced proclivity to spend their money on imports. And make no mistake about it: the presence of immigrants in Greece is just another instance of economic transaction between Greeks and foreign nationals. Indeed, the invitation to work in Greece is no more of a favor to Albanian immigrants than the purchase of an automobile by a Greek national is to its German manufacturer.  In both cases there is a quid pro quo: in that of the automobile the Greek buyer imports the services of German inputs (including German labor) which are embodied in the vehicle whereas, in the case of migratory workers, Greek employers and consumers also import Albanian Labor which are then incorporated into whatever items such “guest workers” help produce. To give another example: if Philippino domestic servants were not available, Greek house-holds could use instead additional domestic appliances which are made in the Philippines by indigenous workers employed in US-owned factories. In both cases Greek households import Philippino labor services, though in one case directly while in the other via the purchase of items that such labor services help to produce. It goes without saying that if decisions of foreign workers in Greece concerning the allocation of their disposable income should somehow be constrained, the same ought to apply to similar decisions made by diaspora Greeks, foreign exporters to Greece, Greeks exporters to the rest of the world and so on. In fact, since every buyer is a seller the pundits' argument implies that everybody's economic decisions should be constrained by everyone else's view of what they ought to be. This is Bedlam -unless one is willing to invoke some arbitrary criteria to cut the Gordian knot (and do not forget that there have been some notorious attempts to implement such solutions -Nazi Germany and Soviet Russia among them). In view, however, of the intellectual and moral stature of the indicated pundits, Marx's dictum concerning the repetition of history as farce readily comes to mind.

3.            The final example involves the time-honored notion of international trade as a zero-sum game and shows that, at least on occasion, fundamental misconceptions can be entertained by ordinary folks and scholars alike. Thus, in his books The Metamorphosis of Greece since World War II, the eminent historian William McNeill has argued that, in antiquity and after, producers of wine and olive oil in the Aegean littoral have enjoyed perennially favorable terms of trade in their dealings with their counterparts in neighboring wheat-growing regions. But what exactly is meant by favorable terms of trade? Upon closer inspection it turns out that McNeill confuses the international terms of trade with the economist's celebrated notion of comparative advantage. In fact, he claims that Greeks obtained the lion's share of the benefits from trade because they acquired more cereals indirectly, i.e., via exporting wine to wheat-exporting regions than directly, i.e., via growing wheat at home (see pp. 63-66). But the benefits from international exchange cut both ways and what McNeill (correctly) says about Greeks applied just as much to their trading partners -for they too acquired not just more but infinitely more (good) wine and olive oil via trade than they could have produced on their own since, by McNeill's own admission, domestic production of such items was virtually impossible. McNeill also claims that the supply of Greek staples in the international market was limited thus altering in Greeks' favor the terms of trade. But limited relative to what? For clearly it is meaningless to compare physical quantities of heterogeneous items (commodities) exchanged internationally and declare one such to be limited, small etc. relative to others. To be sure, one could make a case for limited output by appealing to restrictive production practices but McNeill's sparse comments on the subject seem to indicate that, if anything, the wine and olive oil sectors were the relatively competitive ones.   

Is there anything more than to McNeill's account than the mere truism that is supply and/or demand conditions had been different the terms of trade would have been too? Though he does not say so explicitly, what McNeill seems to have in mind is the irrepressible notion of unequal exchange. Consider, e.g., a world with two regions (Greece, Scythia), two goods (wine, wheat) and labor as the only factor of production. In this world it takes Greece 2 units of labor to produce 1 unit of wine but 4 labor units to produce 1 unit of wheat with the corresponding numbers in Scythia being 12 and 6. Further suppose that each country specializes completely according to comparative advantage and that the international terms of trade settle at unity (i.e., one unit of wine exchanges for one unit of wheat). Consequently, international trade involves the exchange of commodities which contain unequal amounts of labor- Greek wine producers exchange 2 units of their labor (contained in one unit of wine) against 6 units of Scythian labor (contained in one unit of wheat). Put differently, in the international market 1 hour of Greek labor is worth 3 hours of Scythian labor which to some people appears unfair. But notice that (a) in our example unequal exchange derives from differences in absolute productivity levels (with Greece being more productive in both sectors).Clearly no judgment about fairness of international exchange can be made without some knowledge of the sources of productivity differences between countries/regions. That Marxists invariably assume that these sources are attributable to putative mechanisms of force/exploitation does not make it so and, in any case, McNeill does not discuss productivity differences, (b) specialization based on comparative advantage still benefits both regions relative to autarky in spite of productivity differences. Nevertheless, for some people (as McNeill himself points out) it is not absolute gains that matter but rather their distribution and the attendant pecking order of nations/states. If it be true that the envious have inherited the earth, then the confident expectation, entertained by many Greeks of costless redistribution of the benefits from international exchange is almost certainly just another illusion, equally dangerous to the many such which have plagued this country in the post-1980 period.