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Some Econ 101 Myth-Busting-Busting, And The Dumbest Thing I’ve Read Today…

July 9th, 2013 · 38 Comments
Econ 101 · Policy · Uncategorizable

One of the clever things I’ve read today was a piece by Sarah Kliff that answered questions posed about the Affordable Care Act in an Americans for Prosperity Commercial. You guys, it’s just a rhetorical device, no need to actually, like, distribute facts and stuff. Geez.

As such, I quess I was feeling inspired when a friend sent me a link to a deliciously absurd Salon.com article entitled “Econ 101 Is Killing America”. (Ugh, I feel dirty even giving them a link to that steaming pile of…I was going to say dog crap, but Gizmo got offended.) The article lays out 10 supposed myths that economists supposedly propagate and then proceeds to supposedly debunk them, with little need for facts or specifics. Therefore, I couldn’t help but find it appropriate to, well, bust this supposed myth-busting. (Some of the myth-busting is busted because the “myths” are actually true, but most are busted for the ever-popular “economists don’t say that” reasons.) So here we go…

Myth 1: Economics is a science.

I kept waiting for the authors to define “science,” but I was left unsatisfied. The authors’ thesis appears to be “people disagree, so it’s not a science.” Um, if this is how it works, I think someone forgot to inform Copernicus. They do have an interesting quote about how some economic disagreements can’t be resolved by even the best data, but, unfortunately for the authors, I don’t think that most economists would agree with the quote. Furthermore, even when economists do agree with the principle, they understand that much of the disagreement is about normative value judgments, which are a bit removed from the actual science of economics. (In other words, just because you see a decent amount of economists playing armchair political philosopher doesn’t mean that economics is political philosophy.)

Science is about forming theories and then testing and revising those theories, and economists such as Esther Duflo and Al Roth, who have dedicated their careers to using economic experiments to learn about the world, are probably particularly upset by the authors’ characterization of economics. (I would venture to guess that most empirical economists, especially micro people, get pretty ragey upon hearing this classification.) Granted, sometimes it’s difficult to collect data (I’m still trying to figure out how to randomize the country into “tax cut” and “non tax cut” conditions, for example), but that doesn’t mean that people aren’t trying. In any case, this science versus not science thing is a bit of an irrelevant semantic dispute, and the prudent consumer of economics is better served by simply asking for supporting data rather than arguing labels.

Myth 2: The goal of economic policy is maximizing efficiency.

Actually, yeah, it usually is (especially in an Econ 101 context, which is what the authors are supposedly criticizing), for better or for worse, since that’s the only thing that economists really know how to measure. When you figure out a good way to measure fairness and warm fuzzies, let me know. Notice that I’m not saying that a sole focus on efficiency is justified, but rather that there is an opportunity to plug what economists have to say about efficiency into a larger policy discussion. I don’t even know how to address the authors’ point about creative destruction, since…huh? Also, I’ve never heard any economist say that technological progress is bad because it’s inefficient, so seriously, wtf?

Myth 3: The economy is a market.

I don’t think any economist or Econ 101 textbook would claim that we live in a completely free-market world, so I’m convinced that the authors’ straw man exists only in their heads. I’m pretty sure, for example, that economists understand that government spending exists, if for no other reason than they spend a damn lot of time yelling about it. Also, it funds public goods and solves the free-rider problem! Do the authors think that economists believe that roads are created by Santa Claus and the Tooth Fairy? Furthermore, markets can still exist for the inputs to production even when an output isn’t subject to competitive forces. In other words, there may not be a market for roads, but there certainly is a market for the labor that makes them, so markets are more prevalent than the authors acknowledge.

While it is true that non-market production (usually production in the home- i.e. chores, etc.) is not counted in measures of output like Gross Domestic Product, it is not true that economists ignore non-market production or its value. Economists understand that, even though there’s not a buyer and a seller, strictly speaking, non-market production is governed by incentives in much the same way that market production and consumption is. Or, put more simply, we wouldn’t have books like Spousonomics if economists didn’t get that household production was a thing. Or, if you need more proof, you could just check out today’s NYT Economix blog.

Myth 4: Prices reflect value.

I’m actually pretty much on board with this one being at least partly a myth, since I’ve seen a lot of people buy a lot of stupid s**t. As a result, it’s hard for me to think that prices always reflect some sort of objective or rational valuation. I guess it’s also relevant that I’ve watched people’s valuations be affected by a professor first asking whether they would pay a dollar amount equal to the last two digits of their social security number (see, anchoring). But, the thing is, so have most economists, especially those characterized as behavioral economists, and the efficient-markets hypothesis junkies, largely found colocated with regular junkies on Chicago’s South side*, are becoming a more and more endangered species. (Even Alan Greenspan, whom I mention because of the article photo, has come around on this issue and acknowledged his intellectual error.)

Instead of tilting at another nonexistent windmill, it’s more helpful to think about when prices are likely to reflect real value and when biases creep in. Prices could be “wrong” when people base their valuations on what they think other people will pay rather than on what their consumption value is. Prices are likely “right” in well-functioning competitive markets for stuff that people actually use rather than simply resell. Nonetheless, to be on the safe side, Econ 101 texts typically say that “prices reflect some combination of marginal cost and willingness to pay.”

* no offense to South side junkies, who, if Steve Levitt was right in Freakonomics, understand far more about economics than the article’s authors.

Myth 5: All profitable activities are good for the economy.

Okay, so now I am just beginning to think that the authors are bitter that their invitations to join the Pigou Club got lost in the mail. (In tangentially related news, I really hope that the Pigou Club serves this at their meetings.) Most Econ 101 textbooks talk about negative externalities, where production and consumption in a market impose costs on uninvolved third parties or on society at large. Economists are quick to point out that, when negative externalities are present in a market, that market produces more than is optimal for society. As the Pigou Club membership illustrates, many economists are in favor of placing corrective taxes on markets that have negative externalities specifically because they recognize that not all transactions that are profitable for a producer and consumer are good for society. Also, don’t make any claims about economists not distinguishing rent-seeking from productive activity until you’ve read and internalized Joe Stiglitz’s latest book, since he leads quite a few economists with a strong anti-rent-seeking torch. (And yes, a lot of textbooks talk about rent-seeking behavior in the context of asymmetric information, moral hazard, etc.)

Myth 6: Monopolies and oligopolies are always bad because they distort prices.

Ohhhhh, I see what you did there- what the authors are pointing out without seeming to realize it is the concept of the natural monopoly. Does Greg Mankiw need to send the authors a copy of his favorite textbook? (Or maybe the authors can get one cheap in a Cengage fire sale.) A natural monopoly is a company that enjoys such scale advantages (i.e. economies of scale) that it can serve an entire market at lower cost than a larger number of smaller firms can. (You can think of cable television companies or electric utilities as examples of natural monopolies, and natural monopolies usually arise when the fixed costs of production are large but the marginal costs are relatively small and stable over various production quantities.) When economists talk about regulating natural monopolies, they usually outline the pros and cons of price controls along the lines of average-cost and marginal-cost pricing, but they never suggest that it’s better to just break up the monopoly. In summary, this is another issue that is not actually relegated to the dank, dusty hallways of advanced economics. Also, increasing returns to scale and economies of scale are closely related but not identical concepts. So close!

Myth 7: Low wages are good for the economy.

I am tempted to simply point out that the authors quoted the Cato Institute in their second sentence and move on to the next point, since this is getting long. But I will at least put in a little effort and quote Paul Krugman instead: “Cutting one worker’s wage may help save his or her job by making that worker cheaper than competing workers; but cutting everyone’s wages just reduces everyone’s income — and it worsens the burden of debt, which is one of the main forces holding the economy back.” In related news, there’s a big difference between pointing out the downsides of artificially high wages, which economists sometimes do, and concluding that low wages are automatically good.

Oh wait- in order to make their “economists are wrong about low wages” point, the authors quote…drumroll…two economists!

Michael E. Porter and Jan Rivkin state flatly in the Harvard Business Review: “Low American wages do not boost competitiveness,” which they define to mean that “companies operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for the average American …”

Dear authors: if you don’t want me to notice this, don’t quote one guy who is the most famous graduate of my program and another who was on my orals committee. Also, a lot of Econ 101 textbooks talk about the efficiency wage theory, which very directly states that paying higher wages can be the efficient choice for an employer.

Myth 8: “Industrial policy” is bad.

Um, I’m guessing that the authors don’t see the irony in quoting the founder of the Pigou Club to try to make the point that economists don’t like industrial policy. (Alternatively, perhaps Mankiw doesn’t notice the irony he is creating.) So, funny thing- in addition to negative externalities, positive externalities (i.e. positive spillover effects from producing and consuming) exist as well, and the economic policy conclusion is that it is reasonable to subsidize markets that provide positive externalities. As such, there are plenty of economists that would be supportive of favorable policy towards both solar energy and science majors, since both of these goods provide positive externalities, or at least replace products that create negative externalities.

Myth 9: The best tax code is one that doesn’t pick winners.

Come on guys, this should really be a corollary to Myth 8 rather than its own Myth. You even used the phrase “positive externalities!” I do, however, think that I have to abandon the “economists don’t say that” approach here and go with a “actually, I’m on the side of the myth here” tactic. While it’s fine to support markets that produce positive externalities, it’s really hard to do so when the positive externalities aren’t obvious. Therefore, picking “winning” markets is fine in theory but hard in practice sometimes, and picking “winner” companies is way harder…though it does make the case for a Romney presidency, what with his private-equity background and all. (Unfortunately, however, I remember seeing some statistics that showed that the government has a better investment record than Bain Capital.)

Myth 10: Trade is always win-win.

Here I will just paraphrase, of all people, The Stand-Up Economist: Greg Mankiw’s 10 Principles of Economics (in his Econ 101 text!) states that trade can make everyone better off. If trade always made everyone better off, Mankiw would have just said that trade WILL make everyone better off. The fact that he didn’t say this implies that trade can make some people worse off. Granted, this was a joke, but in later presentations he goes on to explain, using a hypothetical example, how trade can make people worse off. Therefore, economists don’t always agree that trade is always win-win, but not for the reasons that the authors propose.

The main thing I take from this is that the authors don’t seem to understand what comparative advantage is. (Hint: It’s NOT the same thing as competitive advantage.) Comparative advantage refers to the ability to produce at lower opportunity cost. There are two ways to have a comparative advantage- be good at producing something or be bad at producing other things. The Korean comparative advantage that the authors refer to is likely a little from column A and a little from column B. The authors also seem to be using “economy” and “producers” interchangeably, as in “And Econ 101 never explains how foreign mercantilist practices, like those China is embracing, can hurt the U.S. economy.” In reality, the economy consists of both producers and consumers, and consumers benefit from the cheap stuff generated as a result of these policies. (Believe me, there are plenty of reasons to be wary of China, but “they’re sending us cheap junk” is not at the top of that list.) I’m not even sure what to make of the last paragraph except to point out that the gains from trade don’t really rely on WHY a particular nation has a cost advantage.

In addition, there is a recurring theme in the piece of “well, upper-level economics courses teach people about that sort of thing, but economists think that people in general are too stupid to understand so they only give the Econ 101 version.” Since, judging by their Wikipedia pages, neither of the authors actually has a degree in economics, so it’s unclear where this particular insight is coming from. That said, I do have some modicum of sympathy for the “Econ 101 doesn’t tell the whole story” theme, since, in a lot of cases, it doesn’t…and that’s why the vast majority of policy advisers have been exposed to more economics than a one or two semester principles sequence. In fact, my students are subjected to a taste of these “upper level” discussions every time I discuss an Econ 101 concept that doesn’t seem to square with reality, as are most people who read about economic research in the media, so I find it hard to believe that this information is being systematically hidden by economic policy advisers.

You guys, the world has got to stop this nonsense, since it’s exhausting to keep writing articles like this. (At least the Michael Sandel one was shorter.) I’m becoming increasingly convinced that Econ 101-bashing is the new cat video of Internet link bait, and it’s really not productive. (Does that mean that it counts as rent seeking?)

P.S. My, well, model, if you will, honestly thought that the referenced article was written by a a teenager akin to those who walked out of Mankiw’s class in a huff during the Occupy movement, and he was dumbstruck to learn that the real culprits were a couple of middle-aged men. Also, I just literally had this conversation:

Update: This was originally in the comments, but I figured it was also worth posting here for clarification:

I went back to the text of the original article and determined that the authors’ beef was actually with some combination of Econ 101 and what economists in the wild tell the world about economics. Their thesis seems to be that economists only present the Econ 101 version of events, which supposedly creates the myths they list. Therefore, my rebuttal is a combination of “actually, Econ 101 is more nuanced than you think” and “economists are actually trying to tell you useful things but you aren’t listening.”

Tags: Econ 101 · Policy · Uncategorizable

38 responses so far ↓

  • 1 Links for 07-09-2013 | Symposium Magazine // Jul 9, 2013 at 5:17 am

    [...] The Dumbest Thing I’ve Read Today… – Econgirl [...]

  • 2 Marie // Jul 9, 2013 at 8:59 am

    I was ranting quite a bit at home when I read this article. The authors seem to really not understand the idea that when we talk about value/prices, etc. that that model also depends on consumers and producers having full information (and of course taking all costs and benefits into effect). The monopoly one also annoyed me – the idea that we don’t think that patents are a good idea in many cases (pros and cons, yes). Oh and we don’t ever consider the efficiency versus equity argument???? Really?
    I have decided that the authors had a very very bad experience in their economics video they watched (they could NOT have actually taken a class) and are now lashing out.
    Oh, and the conversation you show in your cartoon? Yeah, I have that one all the time, too. ;)

  • 3 rootless (@root_e) // Jul 9, 2013 at 10:07 am

    The most obvious flaw in your defense is that you cannot logically defend the contents of Econ 101 courses by claiming virtues for material that does not appear in econ 101 courses. Very little behavorial economics is taught in Econ 101, for example.

    If you want to defend Econ 101, you could start by explaining how the material in Mankiws text is intellectually credible, let alone scientific.
    Perhaps highlighting some of the verifiable theories in that text and explaining how they have been verified would be a good start.

  • 4 Jamus // Jul 9, 2013 at 10:39 am

    Good set of responses, and while I agree with the spirit of much of what you say, I think it is necessary to make the arguments from a tougher position (which to be fair to the authors is the original thrust of their article, although they don’t execute it well at all): do the authors misrepresent what is taught in Econ 101 classes/texts? So defenses such as, “behavioral economics obviously show that this claim in incorrect” or “epistemological debates in economics show that we don’t all agree that it is a science.” Still, there’s plenty problematic about the article: as you mentioned, disagreement among economists about minimum wages/among climate scientists about the speed of global warming does not mean that the discipline is any less scientific, and no Econ 101 text ever claims that the economy is comprised of only markets (if anything, it is the other way round). Myth5 that Econ 101 claims profitable activities are good but market power being bad (Myth 6) are inconsistent, since supernormal profits typically accrue only to those with market power, after all. Even Econ 101 acknowledges Stolper-Samuelson-type redistributive effects of trade, and in any case the authors confound overall gains from trade with within-country losses (Myth 10). When economists argue that prices reflect value (Myth 4), they are not arguing for a free market, merely that they reflect, in part, the distribution of willingness to pay in a market, as captured by a demand curve (and incidentally Econ 101 doesn’t say prices reflect ONLY value, which omits the supply side; it reflects where cost and value meet). And I’m unaware of any principle *econ* texts that make bold claims such as “industrial policy is good/bad” (other disciplines are another matter). They often say *distortions* are often bad (which is generally true), but there is a world of difference between acknowledging the problem of a distortion and corrective policy (any economist writing about policy has in his/her head second-best problems that may be introduced).

  • 5 rootless (@root_e) // Jul 9, 2013 at 11:31 am

    Here’s a good example: what percentage of students come out of Econ 101 knowing that every nation that successfully industrialized did so under a protectionist regime – including the USA ?

    0%?

  • 6 econgirl // Jul 9, 2013 at 12:51 pm

    @root_e: Your first point did cross my mind when I was writing, so I went back to the text of the original article and determined that the authors’ beef was actually with some combination of Econ 101 and what economists in the wild tell the world about economics. Their thesis seems to be that economists only present the Econ 101 version of events, which supposedly creates the myths they list.

    Therefore, my rebuttal is a combination of “actually, Econ 101 is more nuanced than you think” and “economists are actually trying to tell you useful things but you aren’t listening.”

  • 7 Jonathan Finegold // Jul 9, 2013 at 1:01 pm

    Nobody — not even the Cato Institute — argues that “low wages are good for the economy.” Economists might argue that wages need to fall for the labor market to clear, but this concept is true in a specific context. Otherwise, higher wages are good for the economy, if these wages reflect a higher productivity of capital.

  • 8 Jonathan Finegold // Jul 9, 2013 at 1:02 pm

    “Urp.” Above I mean a higher productivity of labor.

  • 9 rootless (@root_e) // Jul 9, 2013 at 1:22 pm

    That there are some caveats and cautions in Econ 101 courses is hardly sufficient to rescue the material. And the result of such over-simplified and false stuff being presented as “science” is that many graduates of these courses have a highly unrealistic idea of how economies work – but an idea that is very convenient for people at the upper end of the wealth distribution.

    And the existence of smart and perceptive economists does not refute the point that many of the most respected and consulted members of the profession are simple ideologues or at least are willing to sell simple ideology. When Gregg Mankiw claims that the science of economics validates tax policies which tax consumption more than income, he is basically putting “God tells the poor to accept their lot and do what their masters order” in pseudo-scientific terms to make it seem like it’s based on unarguable principles.

  • 10 Urstoff // Jul 9, 2013 at 3:44 pm

    rootless, how would you like introductory economics to be introduced? You have to have econ 101 before you can learn econ 102. Supply and demand, marginal analysis, etc. (all the basic conceptual tools taught in econ 101) are needed before one can understand more advanced material. Just like in an introductory physics course, you don’t start with relativity and quantum mechanics, you start with Newtonian mechanics. Along with those conceptual foundations of economics, students do indeed learn some actual truths: in general, demand curves slope downward (surely you aren’t denying this); in general, price ceilings cause shortages; in general, increases in the size of the money supply cause inflation; and so on. Just like, in general, the momentum of an object is equal to its mass times its velocity.

  • 11 rjs // Jul 9, 2013 at 3:45 pm

    Y’all obviously haven’t taught South of New Hampshire

  • 12 rootless (@root_e) // Jul 9, 2013 at 4:10 pm

    The comparison to basic physics is silly. In physics we learn laws like V=IR and the acceleration of gravity is 9.8m/s/s. Later we learn about some complexities, but we don’t find that these principles are false or even debatable.

    In Econ101 we learn for example that comparative advantage benefits both partners – as if import substitution had not been successfully practiced by every single nation that industrialized. That is we learn a “law” that is substantially misleading.

  • 13 Urstoff // Jul 9, 2013 at 4:27 pm

    You didn’t answer the question, but the comparison is completely apt. Newtonian mechanics has a certain range of application, quantum mechanics a wider range of application, and so on, but no physical laws are exceptionless (there are always cases where they break down). Likewise, econ 101 has a certain range of application, but because social phenomena are much more complex, the exceptions are much more numerous and varied and often much more difficult to determine. More advance models and concepts are introduce to deal with these exceptions, just as in physics (or any science, really; I could have chosen biology, chemistry, or psychology and come up with a similar comparison).

    The basic point still stands: you need econ 101 for econ 102. If not, what should be taught in an econ 101 course?

  • 14 Alan T // Jul 9, 2013 at 4:41 pm

    Dear Ms. Beggs,

    Your post is very timely for me, as I am about to read an economics textbook for the first time in 40 years. (I have chosen Mankiw’s Macroeconomics. I am not going to take a class because I think I am too old for that sort of thing.)

    I have two reservations about reading the textbook. I see that you occasionally respond to comments. If you could address either of my issues, I would be very grateful.

    First of all, I am afraid I will be seduced by the ideological implications of economic theories that have only limited validity. For example, the idea of rational agents has strong libertarian implications. If people fail to save for retirement or become addicted to drugs, they must be doing what maximizes their utility, so who are we to interfere? I have just read Kahneman’s “Thinking Fast, Thinking Slow,” so I know why this is wrong, but I am afraid that other economic theories may fool me.

    Also, I am completely confused about the methodology of economics. The following argument must be horribly wrong for many reasons, and I would like to know what those reasons are.

    Economists invent mathematical models of the economy all the time. How can they possibly learn anything about the economy this way? If your model says something about the economy that you didn’t know before, you don’t know if the economy actually behaves that way or if your model is wrong. So you have to look at the economy and see if it does what the model predicts. Wouldn’t you save time by skipping the model and just looking at the economy? For example, I have forgotten what Okun’s Law says, but I recall that it is empirical rather than theory-based. Why isn’t all economics done this way?

  • 15 Kevin Meyer // Jul 9, 2013 at 5:04 pm

    Econgirl said: “Science is about forming theories and then testing and revising those theories…”

    True enough…

    … but, in place of the term “testing” try the phrase “attempting to falsify empirically”…
    … and in place of “revising those theories” how about “abandoning those theories demonstrated to be false in the face of empirical evidence”?

    Unfortunately, that’s not what the mainstream econ orthodoxy seems to be doing (esp. Econ 101 textbook authors, and extra esp. Mankiw).

    Rather, when confronted with contravening evidence, they instead marginally tweak surficial/ancillary elements of their hypothesis to fit the evidence (e.g., layering epicycles upon epicycles; see Schlefer (2012) ‘The Assumptions Economists Make’)… when they should really be radically reevaluating the axiomatic foundations of their theory.

    Continuing to cling to, e.g., a General Equilibrium framework, when such has been conclusively demonstrated to be false (see Debreu, Mantel & Sonnenschein, among others) is not Science, but Faith/Ideology. Ditto in re: IS/LM (see Hicks’ mea culpa @ “IS-LM: an expla­na­tion”, Jour­nal of Post Key­ne­sian Eco­nom­ics, Vol. 3, pp. 139–54) and its derivatives, atomistic utility optimizing [boundedly] rational agents, and a whole host of other derps too long to list…

    Lakatosian degenerate research programme, anyone? Bueller?

    I note you haven’t really addressed rootless’ / @root_e’s points.

    Econ 101 – perhaps the version you might teach? – may very well be more nuanced, but it is certainly not *generally* taught that way based on both what I’ve seen [in person] in the classroom and/or from what I’ve heard coming from the mouths of those unfortunate impressionable students who have had to suffer through the indoctrinations.

    Yes, *some* economists may actually be trying to tell us useful things (and, despite what you may think, some of us are indeed actually listening). But, I’d argue that Reality is trying to tell economists something useful (i.e., ‘Time for a new Hypothesis, not just a warmed-over variant of the same old one’), and many [perhaps most?] mainstream/orthodox economists are not only not listening, but they are actively shutting their eyes and ears.

  • 16 Steve // Jul 9, 2013 at 5:38 pm

    Both the authors come from think tanks that support policies which encourage growth/innovation. I think they are frustrated with trying to convince policy makers of the virtues of policies which support innovation, such as tax credits for R&D. This must be especially the case in America, where half the republicans think any involvement by govt is bad and use econ101 type arguments to defend their case. I think the real beef is not with economists dumbing things down to econ101 type explanations, but non-economist politicians bending the science of econ101 to support whatever their agenda is.

    It should be titled “myths politicians promote in the name of econ101″

  • 17 rootless (@root_e) // Jul 9, 2013 at 5:54 pm

    Urstoff, I don’t accept your premise – which is that the methods taught in Econ 101 are so important that they must be taught first to the exclusion of e.g results from game theory, history, behavorial econ that show those methods to be incorrect.

    The difference between physics 101 and econ 101 is that if I am not working in the quantum domain, V=IR is accurate enough for deduction and building electronic circuits. However if we try to build a trade policy on the basis of comparative advantage we will find out why _not one single nation that successfully industrialized pursued that policy_. In fact, if I remember correctly, Mankiw uses the example of the US exporting wheat to Japan in trade for computers to show comparative advantage – yet Japan’s period of computer exporting followed a massive government program of import substitution. Nobody learning economics from this course would know that critical fact. It’s as if we taught students that airplanes glided through the air and neglected to tell them about jet engines.

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  • 19 Econ 101 “Axioms” and More Myth-Busting | Economic Incubator // Jul 9, 2013 at 7:04 pm

    [...] chock full of basic errors that it’s tempting to go through it piece-by-piece; fortunately, EconGirl has done just that!  Just a few additional comments related to what Atkinson and Lind call “Myth 5″: [...]

  • 20 Urstoff // Jul 9, 2013 at 7:20 pm

    rootless, that is not my premise; I certainly didn’t say anything of the kind. I would have no objections touching on behavioral economics, economic history, etc., in an econ 101 class, but time is, of course, limited. And some concepts (e.g., supply and demand, marginal thinking) are more fundamental than others. Obviously an econ 101 class that taught a lot of Kahnemand and Tversky but didn’t mention supply and demand would be a very bad econ 101 class indeed.

    Also, I’m not sure why anyone would build trade policy based only on things learned in econ 101, just as no one should try to build a nuclear reactor based only on things learned in physics 101.

    Even your whipping boy Mankiw in his textbook points this out about your trade example: “In reality, of course, the issues involved in trade among nations are more complex than this example suggests…” (5th edition, p. 58). But it is an empirical truth that trade and specialization make people and countries better off, and the root explanation of that truth is comparative advantage.

    I’ve kind of lost what you’re actually arguing though. Are you arguing that econ 101 is actually teaching false propositions? In which case, I think it’s safe to say that you are wrong. The principles taught in econ 101 are generally true, but have plenty of exceptions (as does any general principle in the social sciences, and even in much of the hard sciences). Do you think that price ceilings generally do not cause shortages or that increasing the money supply generally does not cause inflation?

    If, on the other hand, you’re arguing that econ 101 courses should have a somewhat different emphasis, then that is perfectly reasonable; I think that general econ 101 courses could be much better (particularly in connecting with what economists actually such; readings from JEP or JEL would be quite illuminating for intro students). But that’s more of a pedagogical point that, however valid, doesn’t really say much about economics itself.

  • 21 Eric Evans // Jul 9, 2013 at 8:09 pm

    “I’m actually pretty much on board with this one being at least partly a myth, since I’ve seen a lot of people buy a lot of stupid s**t.”

    First of all, stupid to who? You? What difference does your opinion make? It’s not your decision, it’s each consumer’s decision. Second, what do you suppose those supply/demand curves in Econ 101 are for? They’re for expressing the attempt to discover the best value; the producer receives what he perceives as the most efficient dollar amount for his product, and the consumer receives the most efficient value for a product he perceives as being worth more than the money needed to pay for it.

    The problem, as usual, is with using a vague definition of value, which allows for convenient shifting of the goal posts.

    “Therefore, economists don’t always agree that trade is always win-win…”

    Well that’s their problem, because it is always win-win. You are always better off in your trade; whether you necessarily “feel good” about the conditions under which you were trading (or your conditions after your trade) is irrelevant. I don’t feel good about trading a good chunk of my paycheck for the additional electric bill during the summer, but I would rather be cool with a lean wallet than burn up with extra cash.

  • 22 Kaleberg // Jul 10, 2013 at 12:02 am

    Maybe it’s the wrong economists who are getting the air time and getting citing by politicians, businessmen and Federal Reserve governors. Maybe it’s time to get some real economists into our public discourse, because the one’s who seem to be advising our decision makers subscribe to those myths and espouse them regularly.

  • 23 rootless (@root_e) // Jul 10, 2013 at 8:42 am

    There’s a fundamental difference between an econ 101 course that teaches comparative advantage with a barely visible caveat and one that would tell students how this works in practice. Because although graduates of physics 101 do not go on to build airplanes without a lot further training, graduates of Econ 101 do participate in crafting or at least voting on trade policies. If you had asked an northern American Economist about comparative advantage in 1850 he would have likely told you it was a fraud, designed to justify and support British Imperialism. Mankiw’s pallid caveat doesn’t give a hint that such opinions existed or why.

    It’s an empirical truth that SOME kinds of trade and specialization make SOME people wealthier, but e.g. many Mexican farmers who could not compete with US subsidized wheat export became beggars and many US factory workers whose jobs were outsourced became significantly poorer. Comparative advantage posits a static world where, e.g China cannot transition from a source of cheap labor to a source of sophisticated design and high tech goods. People who leave econ 101 without any training in disaggregating such claims or testing them against empirical data are poorly equipped to participate as citizens. And yet “Econ 101″ is so often cited as evidence for political opinions – and very often Economists are guilty of this as well. Since you are sensitive about Mankiw, consider Paul Krugman’s silly defense of NAFTA on comparative advantage grounds.

    Students leave Econ 101 having learned supply and demand but not that industrial wages increased during the Depression despite 20% unemployment because of the combination of government stimulus and labor unionism. What is stressed in Econ 101 is not due to scientific necessity, but to a particular political view.

  • 24 Ragweed // Jul 11, 2013 at 12:27 pm

    In fairness to the authors, there are many colleges and universities where Chicago-School inspired neo-classical economics was the paradigm, even up until fairly recently. If the authors are middle-aged men it may well have been they were originally exposed to ECON 101 in the Chicago School hayday. Certainly in my undergraduate days in a very liberal midwestern college, Econ 101 was full-on neo-classical, and Econ 101 students wandered around campus pontificating about how “the minimum wage clearly caused unemployment.” (the mother of one of my classmates was an econ professor at Sarah Lawrence and described our econ department as “a bunch of Chicago-school a——”). Sadly, the Chicago-school a——- also represented what they taught as being pure laws of economics, on the same level as the laws of physics.

    The error that the authors make is the failure to recognize that what they describe is not universal Econ 101, but one particular paradigm which was particularly influential in a number of institutions, particularly a decade or two ago.

  • 25 Kevin Meyer // Jul 12, 2013 at 12:30 pm

    Econgirl said:
    “Furthermore, even when economists do agree with the principle, they understand that much of the disagreement is about normative value judgments, which are a bit removed from the actual science of economics. (In other words, just because you see a decent amount of economists playing armchair political philosopher doesn’t mean that economics is political philosophy.)”

    But, do most Econ 101 students have such an understanding? Again, based on my experience & from what I’ve heard consistently coming from the mouths of [the seeming legions of] doctrinaire students, the answer seems to be a resounding “No!”

    Econgirl further said:
    “In any case, this science versus not science thing is a bit of an irrelevant semantic dispute, and the prudent consumer of economics is better served by simply asking for supporting data rather than arguing labels.”

    In this case, the semantic dispute seems entirely relevant, and the prudent consumer of economics is actually much better served by asking for the claimant’s model (in some detail) for evaluating the economic question/problem being studied, and particularly the underlying axiomatic assumptions of said model… long before asking for supporting data.

    Model selection, and the selection of the relevant axiomatic assumptions underlying a model, is inherently & inextricably an ideological activity, and thus a normative value judgment… NOT a positive one.

    As an aside, your visceral reaction to the Salon article in general reminds me of the Kübler-Ross model (i.e., the Five Stages of Grief). And based on the degree of inferable defensiveness & anger evidenced in your rebuttal, I’d guess you’re somewhere between stages 1 & 2… there are still 3+ stages to go.

    Sometimes when a raw nerve is struck, it is a signal that something fundamentally critical needs to be reevaluated. e.g., see:
    http://rwer.wordpress.com/2012/09/26/rwer-issue-61/
    http://rwer.wordpress.com/2012/03/12/rwer-issue-59/
    http://rwer.wordpress.com/2011/12/12/rwer-issue-58-julie-nelson/
    http://rwer.wordpress.com/2011/03/11/rwer-issue-56-victor-becker/

  • 26 Links 7/12/13 | Mike the Mad Biologist // Jul 12, 2013 at 4:36 pm

    [...] Sequestration Pushes Head Start Families To The Precipice Econ 101 is killing America (though see this; unfortunately, the version Lind espouses is what most people believe Econ 101 is–that hardly [...]

  • 27 Michael // Jul 15, 2013 at 2:23 pm

    This is . . . wow . . . ok, I’m gonna compose a long comment, which I’m going to post elsewhere and also here (where it will be ignored). Bookmarked.

  • 28 Article Collection 07/16/2013 | Moningtonomics // Jul 17, 2013 at 12:01 am

    [...] Jodi from Economists-Do-It-With-Models (a great site) tackles a stupid article by Salon blaming Econ 101 for all of societies’ woes in a post accurately titled “Econ 101 myth-busting-busting and the dumbest thing I’ve read today“ [...]

  • 29 Smiling Dave // Jul 18, 2013 at 6:16 am

    Detailed reply to his article:

    https://smilingdavesblog.wordpress.com/2013/07/10/so-its-econ-101s-fault-hey/

    Long Reply to his Tenth Myth:

    https://smilingdavesblog.wordpress.com/2013/07/11/more-on-comparative-advantage-or-living-well-is-the-best-revenge/

  • 30 Jeff // Jul 23, 2013 at 8:40 pm

    urstoff – “what should be taught in an econ 101 course?”

    A few minor changes would make the world of difference. For example, if in the discussion of supply and demand, you mentioned that normal behavior requires that supply and demand slope in opposite directions, and that when they slope in the same direction you get very, very fast movement, then by understanding the exceptions, you are in a position to understand the rule better.

    Further, if you teach that labor has a “V”-shaped supply curve instead of a linear supply curve (if you have ever been barely treading water while the bills are piling up you know that you respond to decreases in wage price with increase, rather than decrease of labor supply offered to the market) then you can actually work through an example of supply and demand with the forces lining up in the same direction and causing very fast movements in wage deflation as we saw in 1929-1931.

    “Do you think that price ceilings generally do not cause shortages or that increasing the money supply generally does not cause inflation?”

    Um, Japan? Increasing the supply of money in the hands of rich people or corporations does nothing to contribute to inflation. Increasing the amount of money in the hands of poor people when there is no spare production capacity to be brought online will contribute almost exclusively to inflation.

    If you tune into economic pundits in the news and shady outfits like newsmax you can see people over and over again talk about how the money supply is increasing therefore inflation must be around the corner and when it doesn’t actually happen then they double down and say it will be twice as bad tomorrow (or even make up fake inflation accounts from anecdotal evidence).

    The problem, of course is for this purpose the money supply is a bad category. I joke about it’s sister concept, the National Savings Rate as being similar to the National Pregnancy Rate. It turns out that each and every one of us is on average exactly 3 days pregnant… The reason I am hard on the NSR, of course, is because the simplest way to increase national savings is to take money out of the hands of poor people (by killing unions, passing fire-at-will laws, tax structure changes, etc.) and put it in the hands of rich people. A general flow of how that might go is as follows (references to economists below are not intended to apply to all economists – mostly just the Laffer variety):

    Economists circa 1980:
    If you push through laws that break unions and move the tax burden from the rich to the poor then that will increase the National Savings Rate, and we know from our Henry Hazlitt reader that savings is the stuff that growth comes from.

    Ronald Reagan:
    Ok, done. But it doesn’t seem to be working.

    Economists:
    Ok, so try this. We can make it look like it worked by continuing to spend but decreasing our total taxes so that National Savings Rate will get a double-dose of goodness. It will rack up debts for the next generation, but at least it will prove that National Savings fuels growth.

    Reagan:
    Ok, once again done, but growth is now 2/3rds of what it was before 1970 and barely better than during the previous decade’s energy crisis itself.

    Economists:
    Hmmm, ok. I guess not everything works out like you want it to. But notice that even though growth has slowed, it is smoother and has a better Sharpe ratio. Lets rename it “The Great Moderation” and leave it at that.

  • 31 Miguel // Aug 2, 2013 at 7:32 pm

    About point 4, which is what I find very interesting as I work in advertising but had been trained an economist, I think prices reflect predisposition to pay rather than a rational expectation or value. Why I make this distinction? Because a predisposition to pay doesn’t have to be rational as this predisposition to pay is a direct function of the subjective preferences the buyer has in that precise moment.
    Why is this related to advertising? Because advertising can nudge these preferences thus pushing towards a higher predisposition to pay in the buyer, even in commoditized market such as soft drinks and paper towel. Ads do this by increasing brand and product salience without even making a rational argument about the product’s benefits but using creative communication to reinforce memory cues based on former product experiences and buying behavior (for more on this topic I suggest Seducing the Subconscious but Robert Heath).
    I don’t think this nudging on preferences can be considered a reflection on the product’s value therefore what people is actually predisposed to pay for a product is a more complex mechanism rather than a function of value even in competitive markets.

  • 32 Jeff // Aug 3, 2013 at 12:16 am

    Miguel –

    I don’t want to disagree directly with what you say, but I will point out that even neoclassical books like Mankiw’s will still point out that water’s utility value is higher than a diamond’s utility value.

    I think that the real bugaboo here is not the assumption that the value is correct (in other words reflects the factors that it “should” reflect), but rather the baseless assumption that, regardless of cause, there is a unique, well-defined point that supply and demand forces will reliably push you toward.

    Your argument could readily apply to either issue, but I think this is something worth clarifying.

    As you can imagine, the lack of utility of the “there exists a value that supply and demand push toward” is less obvious when talking about the price of goods, which can generally be put onto a boat headed anywhere in the world, than when talking about the price of labor, which mostly stays in one place. The fact that you can have one person waiting tables for $10 an hour in one part of the world and another person doing equivalent work for 10 cents an hour (standardizing by food price) shows that if you have to choose from a “things have value” perspective or a “society has market forces” perspective when you analyze prices, the latter will be far more productive.

    I remember in high school someone showed me a bogus proof that an arbitrary triangle angle was less than 90 degrees (I am taking liberties here. It was a while back). If you look through the proof, the incorrect step looked at the intersection of altitudes for the triangle and in doing so implicitly assumed that the point exists and is found on the inside of the triangle. Of course this is merely a disguised version of assuming what you are trying to prove.

    The “attractor” point in the supply and demand “equilibrium” is not in any sense of the word guaranteed to exist unless you are willing to assume what you are trying to prove similar to what we saw in the phony geometry proof. Each point that is a solution to supply and demand equations is not guaranteed to be located near a local maximum for allocation based on demand, although it probably is if prices are stable for an extended period of time. Further, a local maximum is almost certainly not going to be a global maximum, which means that simply providing enough market disruption to kick you out of one region and into another will cause “equilibrium” to jump to another “strange attractor”.

    Some people say that based on Chaos theory, it is probably easier to control the weather short term than it is to predict it. Similarly, if you can create government interference that will cause pricing models to switch from locally efficient allocations with a low happiness index to rather orbit strange attractors with a higher happiness index then you can do a lot of good. Maybe you can even set a third world country on track to become a first world country. To do that, however means throwing away the idea of a “correct” (in the sense of natural or uniquely determined) price that is the solution to a set of stable forces that you can’t do anything about and moving toward an idea that price is the result of a chaotic system whose parameters are an arbitrary accident of history and to some degree under the control of planners.

  • 33 Michael // Aug 4, 2013 at 12:27 pm

    Nobody — not even the Cato Institute — argues that “low wages are good for the economy.”

    There is very little that’s sadder than a professional economist who is simply unaware of what professional economists do as a group.

    http://www.eschatonblog.com/2010/08/its-great-when-wages-fall.html

    http://www.eschatonblog.com/2011/08/life-among-econ.html

    http://www.eschatonblog.com/2006/06/phantom-menace.html

  • 34 Jeff // Sep 17, 2013 at 12:52 am

    That third link you posted has a rather humorous quote in it.

    http://www.eschatonblog.com/2006/06/phantom-menace.html

    “The result of this leapfrogging process was that inflation became a self-sustaining process, feeding on itself. And ending that self-sustaining process proved very difficult. ”

    The article is pointing out that it is a menace from the 70s that we don’t have to worry about today because today’s economy is different. But how bad was the economy in the 1970′s? Despite the impact of a painful war, and an inflationary spiral fed by major oil and commodity price shocks, the growth rate for the decade, while lower than we expected from the 50s and 60s, was about the same as the economic growth rate of the 80s and 90s and significantly better than the growth rate of the aptly-named naughts. Once you realize that the inflation fears become doubly amusing.

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