Tuesday, January 24, 2017

James Kwak — What’s Wrong With Econ 101

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....
Economism aka Econ 101 is ideology, pure and simple, masquerading as science — because the math "proves" it.
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 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.
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?...
Connecting the dots between Adam Smith and Donald Trump.

The Chronicle of Higher Eduation
What’s Wrong With Econ 101
James Kwak | Associate Professor of Law at the University of Connecticut School of Law


Noah Way said...

My new horror film is titled Attack of the Harvard MBAs.

Ignacio said...

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.

This what Neil Wilson puts as "economists imposing a straitjacket on operations so reality ends up looking as their models" (just said with better words). Economists have managed to shape reality with reverse curve-fitting: if you can't curve-fit your models to reality, just make reality curve-fit to your model.

This is impossible with natural phenomena, but is possible with social phenomena.

Ignacio said...

But even then, it only works as long as all the people can be deceived, and the old saying goes: "you cannot deceive all the people, all the time". Hence the status quo breaking down and Brexists, Trumps, and other events happening (collapse of the EU, at least in its present form, probably will be the most earth shattering event).