Is Academic Economics Broken?

There’s a reason that economists play a large role in the discussion of public policy around the world. Economics touches everyone in ways that matter significantly — work, retirement, healthcare, etc. These pillars of life are central to the livelihood of all people, and economists spend their lives researching and thinking about ways to maximize economic well-being. These methods are often conceptually complex, as sometimes they run up against conventional wisdom; comparative advantage being the the most well-known example.

In my experience of academic economics — which I must admit I came to after my immersion into the economic blogosphere/media discussion — I encountered simplifications of economic theory that illuminated seemingly pervasive problems that could give people just enough information to be confidently uniformed.

After recently completing the most advanced required undergraduate course in microeconomics, I found myself quite disillusioned with the course material.

The Assumption Problem

When approaching an undergraduate survey course, assumptions are an absolutely necessity if mathematical and conceptual ideas are to be broached. However, the inclusion of more assumptions naturally brings with it greater disconnection to the application of the findings that result.

Out of the initial assumptions that were proposed, one particular exerpt from the textbook caught my eye. It was in reference to the “more is better” assumption and is illustrative of the difficulty inherent to creating an extensive survey course in microeconomics.

More is better refers to the idea that all consumers would assuredly prefer more of any good (as a good must be desirable) than less. As well, they will never be satisfied. As the textbook says, “more is always better, even just a little bit better.” In justifying the necessity of these assumptions, the book makes an interestingly revealing statement:

“This assumption is made for pedagogic reasons; namely, it simplifies the graphical analysis.”

Essentially, this assumption is made to make the microeconomic graphical concepts easier to teach. This isn’t necessarily detrimental on its own, but when the simplified graphs are utilized to derive policy conclusions, it can lead to bad outcomes.

The Rationality Problem

A necessary assumption in teaching microeconomics is the assumption that consumers act rationally. Without this assumption — which my textbook immediately acknowledges to be completely unrepresentative of actual consumers —the backbone of the “workhorse” model of basic economics falls apart.

Behavioral economics seeks to solve this problem. Inso doing it is such a vitally important and interesting facet of the discipline. It seeks to go beyond the assumptions that my book says are incongruent with reality. Unfortunately, only one chapter of my textbook was dedicated to the topic. As well, the lecture on behaviorial economics seemed an outlier to the rest of the material and was likely deemed “forgetable” as no question on any quiz was dedicated to the topic.

Again, this is not necessarily a problem if the appropriate measures are taken to illuminate the fact that students are only making assumptions to attain knowledge of the interworkings of intermediate microeconomic models that are divorced from actual consumer/firm behavior.

The Result of Assumptions

About half way through the class, while we were learning to derive the cost minimizing output of a firm, a student asked a revealing question about a firm’s relationship between capital and labor.

Based on the graph to the left — in which labor becomes more expensive as it relates to capital, resulting in an increase in the firm’s spending on capital and a decrease in the firm’s spending of labor — the student asked if the graph meant that paying higher wages would result in less people employed. The only answer that the professor could give — based on the above graph — was yes.

Whether that answer is right or wrong in any particular case is almost besides the point. What is problematic about the exchange is that the students are deriving conclusions from the material that don’t account for variables like productivity, irrationality, incomplete data, etc.

Maybe there is no getting around these problems, but if this material is going to be the most advanced required material for economics majors who will soon enter the workforce, there must be another way.

Minimum Wage

This issue is probably the most common of the contentious economic policies that economic theory has very clear ideas about.

Essentially what the graph to the left is saying is that any minimum wage will result in unemployment and a “Dead-Weight-Loss” (not maximizing market surplus).

In class, there was no doubt about the issue. By the end of the semester, students both before and after class were completely puzzled as to why any politician or economically literate person would advocate for the raising of the federal minimum wage. There was no mention of different equilibrium wages in different states, no mention of higher costs of living in urban areas, no mention of any possibility in which the induced wage growth could moderately induce inflation to a healthy level, and above all, there was no mention of the fact that the above graph states that the complete elimination of a minimum wage is the most economically efficient of outcomes.

“As an Economist”

Throughout the class, my professor often used the above phrase when talking about policy prescriptions that related to the coursework. Most of what followed this phrase seemed off to me. Here are some examples:

“As an economist, I would prefer no barriers to entry.”

“As an economist, I think price controls would never work.”

“As an economist, I think raising the minimum wage is a bad idea.”

These always baffled me, and not because my professor is necessarily wrong, but because policy prescriptions aren’t purely decided on what is economically most efficient. Here are some examples of pretty preposterous things that are economically efficient:

“As an economist, killing all of the elderly mooches on society would be best.”

“As an economist, killing all non-working age persons would be best for per-capita-GDP.”

“As an economist, America should invade Saudi Arabia to acquire their oil dominion.”

Pretty stupid right? I fear that the “as an economist” prefix can be used as a cop out. When relating economics to policy, there are so many variables that encompass ethical and philosophical questions that it would make teaching the relationship in an upper division survey class almost impossible. Unfortunately, my professor put himself into the box of his field without even hinting at the encompassing variables around it.

The Fallout

Because of the nature of all that is described, 30 more students are walking into the world assured of their righteousness on economic policy. There is a recent meme that is prevalent among libertarian proponents of “Austrian” economics that simply states, “Bernie Sanders doesn’t understand economics.” Whether you support Bernie’s economic policy or not, the economic curriculum in which I must get my Bachelor’s degree is producing economic “over-literates” that haven’t spent nearly as much time with the subject of ethics and morality as it relates to all economic policies generally. Maybe instead of students burying their heads in multiple calculus textbooks they should be made to spend a class or two pondering economic outcomes as they relate to ethics & political philosophy.