Economics myths

When I first studied music theory approximately a decade ago, I was rather shocked to discover, unbeknownst to me and apparently every rock band whose music sent me into spasms of ecstasy when played on my headphones at high volume, that parallel fifths in music—not to mention octaves, cross relations, and leaping to a leading tone, among countless other infractions—are bad, bad, evil, bad. Of course, no one who writes music nowadays actually believes this. But that’s not what they told me at the time, and that’s not how my assignments were graded. To this day, as a composer, I have yet to encounter a situation in which the ability to write sonatas in authentic 18^th-century style has come in handy. Anyone? Anyone? Maybe it’s just me.

This is not a case of running into some bad teachers. This is the way music students are taught introductory music theory. It’s a conservatory tradition that goes back hundreds of years, to a time when those parallel fifths actually mattered to people writing music professionally. It’s just that the pedagogy has fallen behind where the field is, to the tune of a decade or twenty.

I encountered this same feeling again this past semester when learning about economics for the first time. Now, I’ll be the first to admit that there is still much about economics, as a field, that I do not yet know or understand. I’m sure that there are smart people out there developing models that take into account the concerns I detail below. For now, though, I want to take a look at the assumptions that underlie the very practice of economics, and the way that those assumptions are presented unchallenged in the standard introductory curriculum.

If all economics tried to do was observe and model human behavior, I wouldn’t be writing this screed. But economists apparently feel that it’s okay to make not just “positive” statements, about what is, but “normative” statements as well, about what ought to be. I often felt, in my introductory econ classes and while reading my textbook, like I was watching an advertisement for Republican fiscal policy. Our reference text, the popular Microeconomics by Robert Pindyck and Daniel Rubinfeld, does not shy away from applying classical economic theory to the issues of the moment. On the contrary, the book analyzes taxes, wage floors, price subsidies, and other attempts by the government to gain revenue or regulate prices for some social purpose. Each discussion is accompanied by helpful graphs that show you how each of these policies creates “deadweight loss” resulting from the reduction in the number of transactions. That’s right, they call it “deadweight loss.” Could they think of a more biased term? I mean, there’s no “happy joy gain” on the graph from the public benefits of fewer people smoking cigarettes or everybody having access to heat and hot water.

And that, friends, is the problem. Classical economics models have no reliable way to represent human happiness or suffering in a supply-and-demand graph. Little things like that are what economists call an “externality” – i.e., they don’t know how to make it into a formula, so they’re just sort of going to pretend it doesn’t exist. (The issue of externalities is first addressed on page 621 of the Pindyck and Rubinfeld textbook, in the 18^th and final chapter.) On the other hand, any attempt to mess with the market causes measurable deadweight loss, so that means it’s bad. It’s all so simple and convenient!

I wouldn’t be harping on this except for the fact that there are actually people, seasoned professionals with jobs teaching economics to young minds, who think this way. Earlier this year, I attended a panel discussion (which was really more like a Lincoln-Douglas style high school debate on steroids) at the Yale Law School entitled “The Myth of the Rational Voter.” The guest star was an associate professor from George Mason University named Bryan Caplan, whose book was both the subject of discussion and the title of the event. Hoping to gain expert psychological insight into electoral politics, I was disappointed to find that the book was apparently an investigation into why “correct” economic policies generally become law despite a vast majority of voters holding “wrong” views about economics. And what were these “wrong” views, one might ask? Yup, you guessed it—tariffs are bad, taxes are bad, rent control bad, free markets good good good. Leaving aside the obvious methodological issues with such a survey (after all, government policies are generally designed to be of greater benefit to the average layperson than the average professional economist), what disturbed me was that there was absolutely no challenge to these basic assumptions from the other panelists. Caplan was allowed to present these opinions as foregone conclusions, as if economic science had shown them to be as obvious as the law of gravity. He also couldn’t help throwing in some smug digs at the (lack of) intelligence of his own students, which of course just made him all the more endearing.

I hear people talking like this and it makes me want to scream. Folks, there is no such thing as free markets in modern society. If markets were truly free, slavery would still be a booming industry in this country, as it was in the 1600s. If markets were truly free, we’d have paid bounty hunters roaming our cities, putting on hits for anyone who wanted to get rid of an inconvenient rival or former spouse. If markets were truly free, crime in poor areas would spiral out of control as public police departments were replaced by private security agencies who would charge more to serve high-crime areas because of higher costs. Heat? Electricity? Firefighting? Forget it, those would be private too. Can’t pay? Too bad.

The fact is, there is a basic tension in economics between efficiency and equality, which Pindyck and Rubinfeld readily acknowledge. Getting maximum productivity (from a profit standpoint) in a market means that people with lower incomes will be left out of the picture. Economists even have a name for these people. It’s “low-value consumers.”

There is an alternative way of looking at the above, which is that there is no such thing as something that’s not a free market. After all, the government systems we do have in place for human services, infrastructure, price regulation, and so on, are essentially the result of consumer action. They voted people into office to institute these reforms, a power no consumer had on his or her own. One could argue that these policies are the result of the “market” deciding, in aggregate, that prohibitions against certain industries might be a good thing. That environmental protection was worth setting limits on what large companies could put into the air or water. This view requires a broader conception of market activity that goes beyond merely buying and selling. It essentially says that whatever happens is part of the larger organism of humanity, that the actions companies and consumers take to affect the market are as much a symptom of the market as a driver of it. It says that markets will always be free so long as human beings are creating and living them.

To believe that, though, would invalidate the classical economic assumption that the only thing people are interested in is maximizing profit. Whoops!