The Narrative & Mechanisms of Economics… Oscar Landerretche

 chile protest

At the current INET conference, there was a forum presented for new ideas for teaching economics. One person who spoke was Oscar Landerretche. (begins speaking at 10:40 in video) He is the director of the School of Economics at the University of Chile in Santiago, Chile. I want¬† to talk about his idea of having a narrative when teaching economics, but first some background…

During his talk he showed a slide of 4 students who among others mobilized protests for a better education. These 4 students graduated and are all now in the Chilean Congress. So political progress was made. Yet progress is tough because the rich own the public school system and hold on to their self-interests.

I taught in Chile for 5 years at 2 universities, grade schools and high schools. I saw a lot of the Chilean educational system. While I was teaching at the Universidad de Concepcion, there were many many protests over the years. All the professors would have to leave the campus before the scheduled time of the protests as clashes of violence were common. In my classes, I would have the students explain the reasons for the protests and the demands being made. Mr. Landerretche talks about his experience of those protests, which can be tense.

Mr. Landerretche then focuses on how students were dissatisfied with the curriculum of economics. The students wanted more classes in ethics, social responsibility, sociology and psychology. The students were very dissatisfied with the way income distribution was being presented. Basically the students will not accept economic models that justify inequality.

He therefore recognized the need for a narrative in teaching the mechanisms of economics (21:45 point in video). The narrative is the social and emotional context within which the mechanisms of economics function. And in Chile, the social narrative is powerful and all-encompassing. Therefore it must be respected and included.

I should pause and explain the difference between the mechanisms of economics and the narrative of economics. The mechanisms are the models and equations that explain economic dynamics. The social narrative is the human experience of the economy. In Chile, the students were being taught the standard models and mechanisms of economic theories. Yet, their social experience (social narrative) made them severely question the models.

Here at Angry Bear blog we present the mechanisms of economics, which include models, equations and data analysis. Yet surrounding the mechanisms is a social context of politics, demographics, social consciousness and environmental concerns. In order to fully grasp economics, we blend social narrative with economic mechanisms.

Recently, I wrote 3 posts here at Angry Bear, which presented a narrative about inequality. I wrote about the hope of a recession to solve inequality (1), the social risk that Volcker took in forcing a recession to battle inflation (2) and a Taoist understanding of recessions as a natural and useful part of the business cycle (3).

The basis of those 3 posts was a social narrative of being upset with inequality to the point that I would welcome a recession if it meant a reduction in inequality. Now globally there are many people mad about inequality. Many are willing to fight it and suffer like the Chilean students. However, my narrative was attacked by economists on the right. They concluded that I wanted to bring pain to the people through a recession. They disregarded the social narrative that people are mad about inequality, because they don’t think inequality has any relevant mechanics. I recommend they try to teach in Chile. The new generation of students would reject them outright.

Undoubtedly, the most powerful current social narrative is inequality. Yet, to prove the adverse effects of inequality, we also develop models, equations and mechanisms. I contribute my model of effective demand. I refer to the work of Bruce Kaufman on minimum wage. Piketty has his analysis of capital share and “r – g”, about which Brad Delong gave a great extended model over the weekend. Deborah Boucoyannis explores the mechanisms of inequality in the writings of Adam Smith. And the list goes on and on…

Returning to Oscar Landerretche in Chile, his country has severe problems with inequality. I lived them and studied them. Their central bank studied the mechanics and wrote years ago that they needed to increase domestic demand. And they have been raising the minimum wage. The minimum wage in Chile went from 127,000 pesos per month in 2005 to 210,000 pesos currently. (3.5% average inflation over that time period.) 210,000 pesos per month still breaks down to roughly $2.20/hour in US dollars.

However, inequality is entrenched there. Over the long history of Chile, the rich have come to possess almost everything. Oh, the stories I could tell if I had the space. In Chile, people constantly say that they have to pay for everything. And the rich collect the rents. One of the main reasons that I am against easy monetary policy in the US at the moment is because the rich are rapidly increasing their ownership of capital and infrastructure. Inequality is becoming more entrenched and harder to reverse. The rich will drive markets to satisfy their own desired standard of living at the expense of society. This scenario explains generations of Chileans.

To wrap up…

As Mr. Landerretche says, a social narrative must be included with the mechanisms of economics. Yet, that idea is going to the next level, which is… the power of the current social narrative is demanding new mechanisms to explain and solve the prevalent socioeconomic injustices of inequality.

Here is a sample from his blog. You will see a blend of narrative and mechanisms.

“But competition is not compatible with inequality and Chile is the most unequal country in the OECD.”

“Chile is, in the end, the only OECD country whose taxes do not improve the distribution of income and where mechanisms predominate that favor large companies and the multinational conglomerates over innovators, new entrepreneurs and grassroots entrepreneurs (such as FUT and DL600).”

“The task is not to eliminate incentives for investment, but replace these with other mechanisms that generate equal access to liquidity, and that are less susceptible to methods of circumvention like tax-evasion and cheating. We all know who pays for the design of these mechanisms.”

The last sentence is certainly narrative.

For those who do not understand Spanish, you can place the URL of Mr. Landerretche’s blog into a web page of translation. (link to blog) (link to page for translation)

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