Wednesday, August 07, 2013

Is Econ 101 Killing America?

Robert Atkinson and Michael Lind post a lively critique of Econ 101 as taught across the neoclassical world with a theme of “10 Myths” in “Salon”
Forget the dumbed-down garbage most economists spew. Their myths are causing tragic results for everyday Americans. 
… Myth 5:  All profitable activities are good for the economy.
Another axiom of Econ 101 is the assumption that all profitable activities are good for the economy: After all, Adam Smith “proved” that pursuit of self-interest maximizes economic welfare. To be sure, even Econ 101 would recognize that societies use legal penalties to discourage economic transactions like prostitution and drug use that are considered immoral, to say nothing of Mafia contract killing.
But the version of Econ 101 familiar to most politicians and pundits ignores the distinction between productive activities (e.g., making useful appliances or lifesaving vaccines) and pure rents (profiting from real estate appreciation, stock manipulation or the accident of owning mineral deposits that become more valuable). If the greatest fortunes are to be made in financial arbitrage, gambling in real estate or exploiting crony-capitalist political connections, the argument that private profit-seeking maximizes economic welfare and the public good is undermined. …
… When the U.S. economy faced little competition and was largely based on industrial mass production industries, it was perhaps not so bad that policymakers relied on Econ 101 as their guide to economic policy. But in a complex, global, technologically driven economy in which nation-states compete to capture markets and key links in global supply chains, relying on Econ 101 is like a physicist today relying on Newton. It’s time for economists to fess up and admit that theirs is not a science and that what passes for Econ 101 is largely misleading. But the public, the media and politicians shouldn’t wait, for it may be a long, long time coming. Rather, they need to understand that a dumbed-down Econ 101 version of neoclassical economics no longer should serve as a road map for economic policy.
I agree with much of Robert Atkinson and Michael Lind’s approach in their article (follow the link for the other “9 errors”.  They seem to think that higher econ classes and post-graduate work fills in some of the inadequacies of Econ 101, whereas I consider they only entrench the initial errors with a more and more complex an unrelated to the real world neoclassical theory.
However, the longest journey starts with the initial steps and I am pleased to see the initial groundwork undertaken with the “10 errors”.  
Economies are complex and relationships between markets (of all kinds) and governments (of all kinds) – and institutions of all kinds (and while we are at it, customs and practices of all kinds) cannot be captured in a pure neoclassical model or set of equations.  
This is where the academy of economists splits off and stops listening (and looking).  Adam Smith’s lifetime’s work, well short of it represented in his surviving works (published by Oxford University Press), remains in a half finished state.  Even what has survived is mostly left unread, which leaves Smith’s project incomplete and vulnerable to easy dismissal by those imbued with over confidence in what they believe is economic science – even glued to the unfaltering certainties that their incomplete so-called “models” which they learned (and in some cases brilliantly invented themselves) in postgraduate works.
Fortunately, beside Smith’s early efforts, many individual scholars have made efforts to bring economics into more scientific approaches that encompass the utter complexities of the real world and the way the multitudes of participants in their societies go about the “ordinary business of social life.
In this sense, I would advise making an effort to read Hayek and to take a look at Schumpeter, some of Kirzner’s writings on entrepreneurship, Daniel Klein likewise, and get a feel for what makes real markets operate. 
Of course, read Adam Smith beyond Wealth Of Nations (read WN if you haven’t done so yet!) and think about describing how we got to where we are (Deirdre McCloskey is an excellent place to start with her ‘Bourgeois Dignity”!).   
Read a few of these books, even casually, to get an idea of the alternative to the neoclassical imaginary world,.  Read about the evolutionary history of the real world, the one we live in.  If we understand how we got here it might help us to better understand more about the prospects for changing those things that might be changed, though we must accept that despite any feelings we may have of the many things that we may wish to change, the agenda for practical changes is tiny in comparison, inckuding over even a longish period. 
In the short period the practical change agenda approaches epsilon. Robert Atkinson and Michael Lind’s article is as good a place as any to start. 


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