Balancing on my Hobie “Peter Pan Slug” long board as sets of ocean waves passed under me at Narragansett Beach in Rhode Island last week, my thoughts naturally turned to the idea of equilibrium — equilibrium with Nature. There I was — balancing while sitting on my surf board, balancing while paddling to catch waves, and then finding the all-important perfect balance when popping up and “dropping-in” to connect with the curl of the wave and stay with it as long as possible. Balance, or equilibrium, is key to surfing. But humans and their economies generally are not in equilibrium with Nature. Hardly.
With my Notice of Appeal to the Vermont Supreme Court (filed June 28) fresh on my mind, finding a perfect equilibrium at sea led me to ponder my grievance, namely the infamous purge-leading Chair of UVM’s Dept of Economics alleged “error” of mine in a lecture she reviewed, which happened to be about balance with Nature, or actually the lack thereof (the key lecture point lost on the Chair, or possibly intentionally ignored).
To be clear, this is not an issue being argued at the appellate level or anywhere in the grievance process (because the Dean, then Labor Board and now Justices at the Supreme Court cannot “substitute” their judgement for that of the Chair regarding economics, pursuant to the collective bargaining agreement). Still, the thought of the Chair getting away with her demonstrably false claim of an error in my lecture kept nagging at me. Each time I finished riding a wave and returned to the outside “break” area to wait for a choice new wave (the ideal time for reflection as a surfer), I pondered the question of economic equilibrium that was at the center of the claim of an error in my lecture, which formed part of the basis for the Chair’s disapproval.
Did I make an error? Or did the Chair make an error when she claimed I made an error? Why would she even make such a claim about my use of quotation marks around the word equilibrium? Claiming I made an error would clearly lead to a negative vote for my reappointment by my department “colleagues”. Was she already out to get me and needed one more negative comment to make sure she put a final nail in the coffin? To address these questions, I decided to pen some thoughts on this purported error upon returning from my family centered, ocean-side vacation. I want to use this post partly as a teaching moment for readers of this blog, and partly to correct the record and debunk the Chair’s erroneous claim that I made an error. So come along for the ride.
Logic and facts will show that there was no error — which can only lead us to speculate as to why the Chair would make such a claim in the first place, as she wrote three of the most negative of the peer letters. Leaving her letters aside, the balance of letters from peers was actually positive, as many who have read them concluded. So it was the Chair who was clearly the scale-tipping peer, and the reason I was portrayed so negatively to the other faculty, and later to the Dean.
Nature’s Transactions Costs, Externalities and “Equilibrium”
The lecture attended by the Chair of the University of Vermont’s Economics Department was titled “Transaction Costs with Nature (and Externalities)”. During this lecture, we revisited the standard trade model (earlier fully presented in previous classes) that assumes no transaction costs with Nature (and no transaction costs at all). This change in my approach was part of my planned set of lectures, but now “going beyond neoclassical perspectives” pursuant to the syllabus, as the Chair knew. It was a class designed to explore limitations after having fully presented the standard model during three previous classes. To explore the model and its limitations related to Nature, we would relax the assumption that transactions with Nature are costless. In the standard model supply and demand diagram — see diagram below showing supply and demand functions, with an equilibrium condition derived internationally but determined by supply and demand conditions inside two countries trading just one good — quotation marks were inserted around equilibrium (these were my own slides). This is where the trouble started.
The Chair claimed that putting quotation marks around the word equilibrium on a slide was wrong because there is still an equilibrium even if the equilibrium is not optimally priced socially. Furthermore, she claimed that I stated that equilibrium was placed in quotation marks because it was not an optimal equilibrium price. Therefore, she is saying that even if the equilibrium is sub-optimally socially, it is still an equilibrium and the word should not be placed in quotation marks. But is it an equilibrium in the larger natural sphere sense, as I had framed this class lecture around? And is it an equilibrium in the narrow standard model sense, given externalities?
Surely a diagram showing students that effective supply equals demand (at the supply and demand intersection associated price) is an equilibrium, but was I saying effective supply did not equal effective demand with use of quotation marks around equilibrium? Hardly, but the Chair implies this, which really stretches the credulity of anybody who knows these models and how much we drive the concept of equilibrium. The Chair, nevertheless, harped on the idea that not having an optimal price does not contradict existence of an equilibrium (clearly, we must worship Equilibrium, as she makes clear below, a concept that many consider an artifact, that is, it does not exist in the real functioning of an economy. But let’s see what the Chair actually wrote:
Senior faculty were concerned about an error in Summa’s EC143 class [the purported error charge came from her visit to the class]. A certain point on a graph was labeled as an ‘equilibrium’ (i.e., in quotation marks}. He then told the class that the word equilibrium was in quotation marks because it was not an optimal price [implying I was conflating not having optimal pricing with not having an equilibrium condition in markets at the suboptimal price]. However, the definition of equilibrium does not depend on whether or not the price is an optimal one [True]. Under the circumstances that his slide was illustrating, the price is not optimal, but it is still an equilibrium [implying that I was claiming it was not an equilibrium]. Equilibrium is a very basic concept and important concept in economics and students need to receive correct information at all times. (Chair-authored summary sent to the Dean for review, 10/24/2016)
Well, yes, it is still an equilibrium, but only in the narrow neoclassical model frame where analytically supply equals demand assuming only private cost functions are all that exist (duh!). The idea that I would stand in front of students and show that S=D (effective supply equals demand) at a particular price and then say this is not an equilibrium is idiotic. Notionally, as will be proven below, supply is actually less than demand if we incorporate a social/environment adjusted cost function (at the private cost function equilibrium price). which was the whole point of the lecture. Elision by the Chair of some key background about the objectives of this particular lecture makes it look worse. This always struck me as clear evidence the Chair was out to get me, as many others would later concur. I said the quotation marks were there because (1) there was not an optimal price and (2) this reflected an imbalance with Nature! Both conditions were related. She either intentionally or unintentionally conflated equilibrium in product markets with equilibrium linked to Nature’s capital stock. Without transaction costs with Nature included in the model (they were not) there can be no equilibrium in the larger biospheric sense (the kernel of the lecture) incorporating the natural sphere, and its supply price. Nature is systemically being underpaid for its supply to production. Later, on exam questions, students were tested on this imbalance concept, and the limitations of the idea of equilibrium in the neoclassical sense when externalities are consdered.
The point of the quotation marks was to show that price was not optimal and the depiction of supply equalling demand is not a realistic picture of the economy’s interaction with Nature’s capital stock (provisioning services). Later in the course, we developed the standard production function and another production function called “Nature’s production function” and we combined them. This was all part of the narrative made clear to the Chair in the syllabus she had and in my outlining of the lecture. Yes, it is true that equilibrium and its definition does not depend on whether price is optimal, but given the suboptimal price I was modeling without transactions costs with Nature in the model (intentionally), the price defined a disequilibrium with Nature — and even in the narrow neoclassical sense, as we will see below. So the Chair is doubly wrong.
The Chair wrote many other ridiculous things about my classes, all of which I debunked in my rebuttal submitted to the Dean (never addressed by anybody at any level — they remain unanswered rebuttal points and the Chair remains unaccountable to anybody for what she wrote). The Labor Board addressed none of it in my grievance before them despite two days of hearings proving use of falsehoods and exaggerations by the Chair and others.
The following issues exist with her own description of her own peer review claiming she discovered an error:
1. The idea is so basic (viz., S=D) that it is hard for anybody to believe that I did not know there was an equilibrium in the product market (clearly everybody could see that).
2. The quotation marks around equilibrium were not intended to imply there is no equilibrium in the product markets — instead to show disequilibrium lurked in the background with Nature.
3. The error is either in the Chair’s understanding of the lecture objective, or worse, it represents a malicious effort to contrive an error to discredit me (I argued in my rebuttal the latter).
4. There is no error regarding the use of quotation marks around equlibrium, even with suboptimal equilibrium pricing (the disequilibrium was with Nature, not product output/product demand).
5. The quotation marks were to identify or distinguish a narrow definition of equilibrium from one that takes into account equilibrium conditions (or disequilibrium) with Nature (see below).
6. Even in the narrow sense, when assuming Nature’s not fully priced in, the standard model might not really be in an equilibrium when incorporating the concept of externalities (supply will be less than demand), which was made explicitly clear to the students in the lecture slides (see below).
Let’s start with what the Chair believes:
a. The Chair believes that the price was not an optimal one; equilibrium price was not optimal.
b. The Chair believes that the failure to include the full cost of production (Nature’s part) does not produce a socially optimal equilibrium.
c. The Chair believes that supply can still be equal to demand even if the price is suboptimal (and apparently not reflecting Nature’s full value).
Therefore, the Chair believes, based on the above, that quotation marks on equilibrium did not give “students correct information…”.As she states: “…the definition of equilibrium does not depend on whether or not the price is an optimal one” [emphasis added] and that I stated “the word equilibrium was in quotation marks because it was not an optimal price” [emphasis added]. The stated premise is correct, but her conclusion is wrong. It is a non-sequitur – it does not follow logically. The suboptimal price I was modeling by definition produces disequilibrium. The quotation marks around equilibrium were simply to suggest that while equilibrium existed in the private cost based sense of product markets, when Nature and externalities are factored into the model, the notional results change.
First, it was not truly an equilibrium in the larger wholistic sense (hence the quotation marks), thr emphasis in my entire heterodox approach to this class, which the Chair knew about because I prefaced the class with a Venn diagram to explain the concept of Nature and transaction costs (it was the title of the lecture). The natural sphere cannot be ignored; its supply price must be paid or we remain out of balance. This was a key point.
Second, supply will always be notionally less than demand in the presence of negative externalities (and the related suboptimal pricing). It is inescapable. The Chair apparently doesn’t know enough about externalities and basic micro to see this, or worse, she deliberately made it out to be an “error” when it was not if she knew the analytics.
The Chair knew about my larger picture approach but did not mention it.
The Chair failed to mention that the opening of my lecture included a Venn diagram, which I drew on the chalk board showing the economic sphere (Economy) as a subdomain of the larger natural sphere (Nature). The diagram was drawn to show that the economic sphere interacts with the natural sphere and there is no way around this fact. Even as a surfer, I am having some impact on Nature when I surf, however small it might be. This is a far cry from destroying thousands of acres of the Amazon to graze cattle for the world’s booming fast food market. Yet both illustrate perpetual use of Nature.
Next, the Chair saw that before the supply function is adjusted upward to reflect transaction costs with Nature, the standard model’s “equilibrium” must be out of balance with Nature; it is in equilibrium regarding the private product market (S=D) only. In other words, Nature is supplying inputs into product markets at a price that is below sustainable levels or below its true “capital” costs. This was my argument. There isn’t an equilibrium between the natural sphere and the economic sphere! How could there be if Nature’s capital stock is being systemically underpaid? Clearly there is no balance if Nature is being degraded over time. Wouldn’t this justify use of quotation marks around equilibrium? Apparently, this is sending students the wrong message. Imagine, this in the era of climate change and its pending threat to our very existence.
I did say that there is a suboptimal price, as the Chair acknowledged, but I did not say that a suboptimal price negates equilibrium in private markets, per se. She should have seen it was clearly in relationship to Nature, the whole emphasis of the lecture. By putting quotation marks around equilibrium I was implying private markets systemically underpay Nature and Nature’s capital stock is degraded, so there is no equilibrium with Nature. But there is more here than meets the eye.
The students know that when S=D at an equilibrium price (this is pounded into them in every class) it is an equilibrium in the product markets (this is obvious). By alluding to lack of an equilibrium (balance) given the failure to incorporate Nature’s transaction costs into prices, I was also showing that there was a notional disequilibrium right on the slide, another reason for the quotation marks.
What I taught described honestly
Let me rewrite the Chair’s statement to reflect how it should have read if it were done with honest intent:
A certain point on a graph was labeled as an ‘equilibrium’ (i.e., in quotation marks}. He then told the class that the word equilibrium was in quotation marks because it was not an optimal price given Nature’s costs are not reflected in the price and markets oversupply output. However, the definition of equilibrium does not depend on whether or not the price is an optimal one. Still, under the circumstances that his slide was illustrating, the price is not optimal and there is a disequilibrium vis-a-vis Nature’s capital stock even if an equilibrium exists in the product markets. Equilibrium is a very basic concept and important concept in economics and students need to receive correct information at all times, so it is essential to show the limits of the use of equilibrium in standard model economics when incorporating the larger biosphere into the picture.
But the Chair was on a mission to remove me, not present me in any way as doing effective teaching. In fact, the proof of the Chair’s own error is right on slide 13 that followed my slides presenting the role of transaction costs with Nature and social/environmental costs (externalized, hence systemic negative externalities). What I wrote was that most of the expansion of international trade over the last two centuries has taken place without “reflecting true social and environment costs” and thus markets have been “systemically overproducing [viz., a persistent disequilibrium] with market prices below equilibrium from an externalities point of view” (emphasis added). This was taught to the students and the Chair took notes and saw the slides. There you have it. If Nature’s price was fully incorporated (assuming we know it for the sake of the argument), then the quantity produced would be lower — and it is too high, otherwise. But since firms operate along a private marginal cost curve (as shown in the model below), they don’t pay Nature fully. Let’s take a look at the “equilibrium” price in the model below associated with the black colored private cost/supply function (labeled “S”) to make this point clearer.
As you can see (assume “transport” costs means social costs), at a price of $50 and reading off the supply and demand (black-colored functions), private product markets are in equilibrium (S=D). But this is the equilibrium that does not notionally incorporate persistent negative externalities (costs external from private production). Looking at the above diagram, again, if the red supply function reflects the true supply cost function (incorporating Nature’s transaction costs), at the private cost function equilibrium price of $50 (the private markets determined equilibrium price) there would be zero output supplied, but demand at $50 would be 40 units! Clearly, from an externalities point of view, that is with Nature’s costs externalized, production is too high (not socially optimal), but more importantly, supply is less than demand at the price of $50 (the “equilibrium” price without Nature’s transactions costs). We have an equilibrium only in the private markets sense, not when the markets take into account Nature (here notionally), which markets in practice never do fully. Again, quotation marks were around equilibrium because this was not socially optimal because their was an underlying imbalance with Nature, which analytically implied a disequilibrium price, as well.
This was presented and expressed in my lecture. So a supportive and honest Chair would have written truthfully about this. Instead facts are left absent through elision. She knew how popular I was with students, so the only way to get me out of her department was to amp up the negatives, which she quite demonstrably overdid, and that is now hurting her credibility (students don’t believe her as do many others, including senior members of the Faculty Standards Committee faculty).
What I was clearly saying to the students was that the standard model (in “equilibrium”) tells us that supply does equal demand, but if Nature is being paid less than its value then this is not a real equilibrium in the sense of the natural sphere’s long-run (true) reproduction costs. It is a disequilibrium! Markets are supplying too much under these conditions! In fact, the quotation marks are dropped in the next slides in that lecture when we later shifted the supply function upward to assume Nature gets fully paid for inputs; this theoretically means Nature’s supply price is being met. But only if the price rises, of course. Otherwise, S<D (disequilibrium) at the new higher marginal social cost of production assumed because we are incorporating Nature’s transactions costs. Unless price reflects fully Nature’s value in production, markets are over–supplying because Nature is not charging a high enough price (this is not sustainable and thus an imbalance — Nature’s capital stock gets degraded).
An example might be to ask what is the true cost of rainforest destruction to graze more cattle? The cost to destroy the trees is one thing but all the social and environmental costs of doing so are unknown, and thus not being paid. This despite equilibrium in the supply and demand for Big Macs that might arise in that product market. We could have the supply of Big Macs equal demand for them, but the price would not be optimal and this would hardly be an equilibrium in the broader sense of my heterodox (wholistic) approach to economics (rainforest destruction real costs are not in the price – thus there is overproduction socially speaking). The Chair knew this but omitted it, which allowed her to make her ridiculous claim of an “error”. This is a Chair who once told me that “nobody in the department has an ideology” when I asked her what the ideological make up of the department was upon accepting the position as full-time lecturer, a position offered to me by outgoing Chair, who had just completed her term.
The market is not putting a full price on Nature’s use (and abuse) because markets can (and do) systemically generate “negative externalities” — externalized costs of production to society (e.g., private corporations don’t pay the real costs of Nature’s use because they can get away with it; it is a free lunch, in fact). The lecture described this as the “Invisible Foot” of markets and contrasted it with the proverbial “Invisible Hand”, or socially positive role of markets. None of this was mentioned by the Chair even though it was essential to my lecture. She instead (like in her other visits to other classes I taught) simply looked for whatever negatives she could find, or manufacture.
The entire point of the lecture was apparently lost on the Chair. Being trained in a very narrow-minded neoclassical (non-ecological) economics framework, the Chair refused to see the lecture outside of her frame of reference. Students, of course, understood the concept perfectly well. I received record high scores (considered excellent by the Chair’s standards) from students on their evaluations at the end of that semester, on rubrics like “theoretical concepts handled effectively” and “communicates in a clear way.” In fact, I was well ahead of many other teachers in the department, some of whom repeatedly flunk the student evaluations by a wide margin. But, for these tenured faculty, they get a free pass. I was shown the door for “poor” (Provost relying on the Chair’s comments) teaching while poorly rated teachers remain because they are tenured.
When you try to do outside-the-box economics and then UVM throws you out, there is clearly a problem. But the problem is that department is well-known for hating ecological critiques of the standard model (no, not too strong a word given my experience there) — like ecological (holistic) approaches that seriously challenge the conventional wisdom about left or right economics — whether critiquing ideas from right wing neoclassicals (now the dominant clique in the department) or from liberal-left post-Keynesians/neo-Marxists (we have a few still).
There are several in the department who are so pathetic as teachers that they would be thrown out if they did not have protection from tenure (which should never have been given to them). I am not mentioning names because I don’t want a lawsuit, but students don’t need to be told as they are the recipients of the abuse — and know who these teachers are.
Back to finding balance with Nature…Surf’s up!
~JS