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I should think the best ‘Econ 101’ today would be a summary presentation of Piketty, “Capital in the 21st Century.” > On Jan 23, 2017, at 10:40 AM, Louis Proyect via Marxism > <[email protected]> wrote: > > ******************** POSTING RULES & NOTES ******************** > #1 YOU MUST clip all extraneous text when replying to a message. > #2 This mail-list, like most, is publicly & permanently archived. > #3 Subscribe and post under an alias if #2 is a concern. > ***************************************************************** > > THE CHRONICLE REVIEW > What’s Wrong With Econ 101 > By James Kwak JANUARY 22, 2017 > > If you are a Wall Street master of the universe or a billionaire hedge fund > manager, you face the same challenge as the aristocrats and industrialists of > the past: How do you justify the vast economic chasm that separates you from > the people you pass on the street every day? Appeals to Christian theology or > evolutionary necessity may have worked in previous centuries, but they are > unlikely to be convincing today. Instead, you can turn to another source of > economic truth: Economics 101. > > From taxes to wages to government regulation, our political discourse is > dominated by a lesson that economics students learn in their first semester: > the model of a competitive market driven by supply and demand. Introduced to > the world by the French mathematician Antoine-Augustin Cournot in 1838, this > now-ubiquitous analytical tool shows how many units of a product are demanded > and supplied at any given price — and how prices automatically adjust so that > supply exactly equals demand. This core insight dates back at least to Adam > Smith, who explained in his 1776 book The Wealth of Nations that market > prices are determined by the individual, self-interested decisions of buyers > and sellers. > > By the late 19th century, supply and demand curves became a dominant feature > of economics education, thanks in large part to a textbook, Principles of > Economics, by the British economist Alfred Marshall. Marshall showed how > buyers and sellers, acting in their own interests, converge on an equilibrium > price that maximizes social welfare, defined narrowly as the difference > between the value consumers place on goods and the total cost of producing > those goods. > > Marshall, however, rejected the idea that we should simply let markets work > their magic and accept whatever outcomes they produce. Instead, because > people differ in wealth, he argued that "aggregate satisfaction can prima > facie be increased by the distribution … of some of the property of the rich > among the poor." > > “If we were to redesign Economics 101, what would it look like? One > possibility is to begin not with abstract models, but with the real world.” > That view was echoed in the 1948 first edition of the textbook that would > dominate the market for the next three decades. In Economics, Paul Samuelson > wrote, "John D. Rockefeller’s dog may receive the milk that a poor child > needs to avoid rickets. Why? Because supply and demand are working badly? No. > Because they are doing what they are designed to do, putting goods in the > hands of those who can pay the most." For Samuelson, the competitive market > model of Economics 101 was simply a useful analytical tool. > > For his contemporaries Friedrich A. Hayek and Milton Friedman, however, it > was something more: the heavy artillery in an ideological battle against the > New Deal. In the 1940s and ’50s, Hayek and especially Friedman built a > comprehensive theory of society on the foundation of competitive markets. In > his 1962 book Capitalism and Freedom, Friedman explained how virtually any > social or political issue could be analyzed in terms of supply and demand — > and concluded in each case that government should get out of the way and let > free markets produce the best of all possible worlds. > > Both Hayek and Friedman saw themselves as participants in a battle of ideas > against encroaching socialism. In their hands, an analytical framework became > a universal worldview: Economics 101 became economism. Economism is the > belief that basic economics lessons can explain all social phenomena — that > people, companies, and markets behave according to the abstract, > two-dimensional illustrations of an Economics 101 textbook. Ideally, students > should learn that the competitive market model is just that — a model, which > by definition abstracts from the real world. According to the rhetoric of > economics, however, the lessons of Economics 101 can be transplanted directly > into the real world. The central idea that free markets generate the greatest > possible economic well-being for society becomes a universal framework for > understanding and answering any policy question. > > Economism may not accurately describe reality, but its reduction of complex > phenomena to simple concepts was a major asset in the battle of ideas. The > political landscape of the United States after World War II was dominated by > the shadow of the New Deal and the idea that the government could and should > play a major role in managing the economy. Businesses that opposed intrusive > regulations and wealthy individuals who feared higher taxes needed an > intellectual counterweight to the New Deal, a conceptual framework that > explained why an activist government was bad not just for their profits and > their pocketbooks, but for society as a whole. Economism filled that need. > > The rhetoric of economism was taken up first by think tanks such as the > Foundation for Economic Education and the American Enterprise Institute, then > by the National Review of William F. Buckley, who helped make free-market > economics part of the conservative synthesis. From Barry Goldwater to Ronald > Reagan, the conviction that all economic problems could be boiled down to > first principles and solved by the magic of competitive markets became a > central tenet of conservative ideology. In the memorable words of Dick Armey, > the former House majority leader, "The market is rational and the government > is dumb." > > As the mantra of free markets, small government, and lower taxes became more > popular with voters, Democrats adapted by also paying homage to competitive > markets. It was Bill Clinton who said, "The era of big government is over." > And Barack Obama’s signature health-care-reform program is centered on the > idea of using (regulated) market competition to expand access to health > insurance. > > Economism presents itself as an abstract, value-neutral representation of the > world — one that invokes the prestige of economics, a discipline that many > people find intimidating. "It’s just Economics 101," one often hears. The > role that it plays in contemporary society, however, is deeply ideological. > Economism naturalizes one possible state of affairs — in which individuals > and companies are left to compete in unregulated markets — and, like Doctor > Pangloss in Voltaire’s Candide, celebrates the outcomes that result as the > best of all possible worlds. > > But in reality, things do not always turn out so well. In practice, economism > often has the effect of increasing inequality, or at least justifying it in > today’s new Gilded Age. Consider the minimum wage. The United States has the > lowest minimum wage, as a proportion of average wages, of any advanced > economy — one reason for our wide gap between rich and poor. But according to > economism, raising the minimum wage would only backfire and harm poor people. > On a simple supply-and-demand diagram, a minimum wage is a price floor in the > labor market; like any price floor, it must cause supply to exceed demand. > Therefore, raising the minimum wage must increase unemployment, and anyone > who disagrees simply doesn’t understand Economics 101. > > In real life, however, employment levels are the result of many factors — > some businesses can pass cost increases on to customers, better-paid workers > are less likely to quit, and so on. Real economists study these relationships > in detail, and a significant body of recent research indicates that modestly > higher minimum wages have no discernible effect on unemployment. > > Despite this empirical evidence, the public-relations campaign against a > higher minimum wage remains clothed in the rhetoric of economism. What goes > unsaid is that the campaign is, in significant measure, funded by industries > that benefit from low wages for unskilled labor. This is but one example of > how economism provides a seemingly neutral perspective on the world that can > be deployed in the service of business interests and the wealthy. > > Economism is the reduction of social reality not just to Economics 101, but > to just one Economics 101 lesson: the model of a competitive market driven by > supply and demand. > > Paul Samuelson bemoaned the fact that a single idea — that free competition > is always good and government intervention is always bad — is often "all that > some of our leading citizens remember, 30 years later, of their college > course in economics." Writing in the late 1940s, Samuelson’s first concern > was preventing another Great Depression and the geopolitical turmoil that > followed. In his textbook, which dominated introductory courses during the > decades following World War II, the theory of supply, demand, and prices is > not discussed until Chapter 19, more than 400 pages in. > > Contemporary textbooks, however, have moved away from Samuelson’s example. > Whether by the slightly right-leaning N. Gregory Mankiw or the slightly > left-leaning William Baumol and Alan Blinder, they emphasize rational > individuals pursuing their self-interest in competitive markets, guided by > Adam Smith’s invisible hand to maximize their collective prosperity. > > While economics professors know that the world is much more complicated than > an introductory textbook, many college students are still inculcated with the > simplistic dogma of competitive markets. As the Times Higher Education > summarized the results of a recent survey of undergraduate programs around > the world, "economics degrees are highly mathematical, adopt a single narrow > perspective and put little emphasis on historical context, critical thinking > or real-world applications." This limited focus is even more true of business > programs — the most popular undergraduate concentration in the United States > — whose students often take little more economics than a required > introductory course. > > Economists already know the cure for Economics 101: better economics. Many > advanced courses deal precisely with the differences between the real world > and the introductory models taught in the first year. No doubt many > instructors are able to give even casual students a healthy skepticism > regarding the ideology of free markets. People who are familiar with the > irrational behavior of human beings, the importance of institutions, the > techniques for analyzing real-world data, and the vicissitudes of economic > history will understand both the utility and the shortcomings of the > competitive market model. > > The pedagogical problem is that the typical introductory course does not > allow enough time for anything more than a cursory introduction to these > vitally important subjects. Professors can and do emphasize the limits of > models, but even then a course centered around supply and demand curves will > often produce the students that Samuelson lamented, who remembered only that > competition is good and government is bad. > > If we were to redesign Economics 101, what would it look like? One > possibility is to begin not with abstract models, but with the real world. > How do companies use technology to produce goods, and how are those companies > organized? How are products and services distributed, and how do > manufacturers, intermediaries, and retailers set prices? How are wages > determined — not in the theoretical model, but in real life? What factors > determine the set of opportunities available to different people on different > parts of the planet? > > The economist Partha Dasgupta, for example, begins his "very short > introduction" to economics by describing the different material and economic > conditions of two families, one in the suburban United States and one in > rural Ethiopia. Students who begin with a grounding in the way the world > actually works will be better equipped to understand the limitations of > abstract models when they do learn them. > > Alternatively, we could begin with real human beings. An introductory course > in behavioral economics would reveal that we all make decisions irrationally, > at least compared with the utility-maximizing entities who populate the > typical textbook. The same is true of organizations, which are populated by > fallible human beings who often have their own interests at heart. > Understanding the importance of habit, convention, prejudice, and other > factors will enable students to resist the allure of models that assume > superhuman actors and perfectly efficient firms. > > Or, perhaps, we could do away with the idea of Economics 101 altogether. I > studied history and I teach law, neither of which has a single "101" class. > There could be one introductory class called "Economic Institutions Around > the World," another called "Decision Making by Individuals and > Organizations," a third called "Economic Development Through History," and a > fourth called "Abstract Economic Modeling" (what is now "Economics 101"). > Economics majors could take them in any order they wanted, and nonmajors > could take only those that interested them. People who take only one > economics class would not necessarily be indoctrinated in the myth of the > invisible hand; students who are serious about the field would learn > everything they need to learn, but with the context necessary to understand > the uses and limits of simple models. > > Such a program would also be more true to the extraordinary richness of > contemporary economic thinking, encouraging a more diverse range of students > to enter the field. The premise of economism is that "economics" says only > one thing: that unregulated competitive markets produce the best outcomes for > all people. One antidote is for people to understand that economics is a > fascinating discipline that provides many answers to many different kinds of > questions — and to seek out those answers for themselves. > > James Kwak is a professor at the University of Connecticut School of Law. > Portions of this essay are adapted from his new book, Economism: Bad > Economics and the Rise of Inequality (Pantheon). > _________________________________________________________ > Full posting guidelines at: http://www.marxmail.org/sub.htm > Set your options at: > http://lists.csbs.utah.edu/options/marxism/galliher%40illinois.edu _________________________________________________________ Full posting guidelines at: http://www.marxmail.org/sub.htm Set your options at: http://lists.csbs.utah.edu/options/marxism/archive%40mail-archive.com
