Having a little bit of economics is worse than having none at all

When it comes to policy.

P. J. O’Rourke on Wait Wait Don’t Tell Me just made a joke about how Obama needs to read an economics 101 textbook and apologize to Paul Ryan.

As a professional economist who knows and has personally met (and is known! by a subset of) economists who have advised the past FOUR presidents, I submit that Obama knows a hell of a lot more economics than Mr. P. J. O’Rourke does (who, admittedly also made jokes during today’s broadcast about how bad he is and has always been at math).

The problem is that a lot of folks take Econ 101, maybe Econ 102, which teach very basic theory and then they don’t take any field courses that deal with economics in *reality*.

In Econ 101, we have to keep things simple so that people can get the basics down.  How do supply and demand work?  What does thinking at the margin mean?  What are sunk costs?  How do interest rates work?  What is GDP?  And so on.   These are really complicated and deep ways of changing the way most of us think.

In order to make these concepts as simple as possible, we have to make a whole lot of simplifying assumptions.  We assume that markets always work– there is no market failure.  (Advanced classes may get to externalities by the end of the semester, but that’s generally the only source of market failure that they get to.)  They assume that the world is in perfect competition (and again, more advanced courses may get to monopoly power by the end of the semester, but many do not).   We assume that markets have full information and that all (identical) people are able to make rational decisions that involve complicated math problems instantaneously and in their heads.  When we make all of these simplifying assumptions and do the math, it seems very obvious that we shouldn’t have government at all except to enforce contracts and property rights.

It is true, a few PhD economists are still stuck on these theoretical dreams.  For example, Gary Becker’s work *proves* that taste-based discrimination cannot exist in theory… given the assumption of perfect competition and that we are in general equilibrium.  And if we had perfect competition, then of course nobody would discriminate against blacks or women.  Therefore if we see any differences it must be because blacks are inferior (he allows that that might be because of pre-labor market conditions like bad schools) and women should stay at home and support their husbands.  [Note:  he is wrong.  The perfect competition assumption does not hold, so owners can take some of their oligopoly rents as tastes for discrimination.]

Reality is, we live in a messy world of imperfect competition and there’s room for a lot of market failures whether we’re talking general equilibrium or partial equilibrium.  In addition to the basic problems of monopoly and externalities and partial equilibrium that are often covered in Econ 102, there’s a whole host of problems that lead directly to market failures.  There’s moral hazard, public goods problems, adverse selection, and sometimes paternalism (since most people who aren’t economists and even some who are aren’t the fully informed rational actors we assume they are in Econ 101).

All of these complications and all of these sources of market failure lead to the potential for government intervention.  Now, there are always costs to government intervention, and sometimes the costs outweigh the benefits or vice versa.  But suggesting from your very limited knowledge of economics that anyone who believes in any government intervention needs to read an Econ 101 textbook is ludicrous.  Instead, I submit that such folks need themselves to take and understand more economics.  They need to understand what happens when those simplifying assumptions we made in Econ 101 break down.  And they can use those tools that they learned in Econ 101 to get that understanding.

Until then, I submit that knowing a little econ is more dangerous than knowing none at all.  And I urge people who teach Econ 101 to add caveats when they’re doing this teaching and be very clear about the assumptions being made in order to get to the conclusions.  My 102 professor (a labor economist) was very good at doing that and those caveats awakened my thirst for further knowledge for when that world isn’t as perfect as it seems in that initial 101 class.  My sister couldn’t handle the unrealistic assumptions in 101 (stated as fact) and rejected the entire field– and perhaps that’s another way to go.  Personally I’m glad I stuck with it until I got to the more reality-based stuff.

And that’s my rant.  Any comments on when knowing a little of something is more dangerous than just using your common sense?

20 Responses to “Having a little bit of economics is worse than having none at all”

  1. Ana Says:

    Anything related to medicine. Now people can, of course, learn a LOT about their health conditions and be excellent participators in their care, but that needs to go way beyond “something I saw on Yahoo Answers”. That tiny bit of (mis)information often leads to people thinking they know better than the healthcare professionals that have been trained for years.
    I’ll add biomedical science as well…with so much preliminary research making it into the lay press, people read the headlines about some small un-confirmed mouse study and automatically apply it to their own lives.

    • Debbie M Says:

      I don’t find this to be true for me. Reading up on my symptoms often helps me realize more things that need to be communicated to my doctor. And it helps to deal with the problem of perfectly trusting that doctors are kind of magical. Instead I feel that those in the medical fields are the experts on medical stuff, and I am the expert on me. So we need to work together as a team. Also, since I’m the one making the final decisions about me, I do need to know a little medical knowledge, and I can’t know everything related to my health (or even all that my doctor knows), so I have to settle for just knowing a little.

  2. rented life Says:

    Psychology: Let’s diagnose everyone with GAD! Or depression! And demand you take drugs. Because you should only ever feel sunshine and rainbows all the time.
    Communication: Media causes violence. Duh. I spend every semester debunking this. I’ve spent years of my life studying and understanding media effects. The picture is bigger than most are even aware of, and every time someone claims these direct effects I go a little nuts. (Same thing happens with schools hire English teachers to teach Public Speaking. I’m the one with the degree, background and training and English and Communication aren’t the same thing, sorry. If anyone could teach speech, we wouldn’t need to offer it as a class. No offense to the English people, it’s the people making the hiring decisions that drive me nuts.)

  3. Viola Says:

    Evolution. I’m assuming I don’t need to list any examples here. I heart evolution, BTW, but there are both annoying and horrific examples of how it can be applied inappropriately if you don’t understand it fully.

    • Leah Says:

      So true. Lots of biology, really. I teach HS biology, and sometimes the questions (and what my students claim they “know”) completely throw me. Just because you saw something on Jerry doesn’t make it so. They also have a weird tendency to think that exceptions are widespread.

      Today, the big shockers were whether or not a woman can have twins without the help of a doctor (yes, of course, but you have to have a doctor to help if you intentionally want to have twins) and whether or not women can naturally have 8 babies. One of my students even said “haven’t you heard of octomom?” To which I replied “Didn’t I just say that you can have lots of babies if you get a doctor to help?” Oh, and the best, which I’ll leave you with: “Don’t you just have to have sex for a really long time to have twins?”

  4. Debbie M Says:

    Whatever you’re teaching. I’ve heard of math teachers who say that you can’t subtract a bigger number from a smaller number, for example. And of (more knowledgeable) math teachers who don’t understand the way some of their students are doing some things (and don’t try)–if it’s not their way, they declare it wrong.

  5. Miser Mom Says:

    Swimming. You really have to keep an eye on little kids who have just overcome their fear of water. And swimming is exactly the reason we use that metaphor, “You’re in over your head!”.

  6. Laura Vanderkam (@lvanderkam) Says:

    I don’t know on the economics one. People who don’t have any economics background sometimes assume there are no trade-offs involved in policy decisions. There are, it’s just that different people assign different weights to the results of those trade-offs.

    • nicoleandmaggie Says:

      I would argue that people with Econ 101 have the same problem. The equity-efficiency trade-off is not covered until much later. Econ 101’s tradeoff of Guns v. butter (or pizza v. beer in more modern texts) is simple enough that common sense covers it.

  7. Cloud Says:

    I love this post! I don’t really have any new things to add to the list of subjects in which a little knowledge is dangerous. But… do you have any good “intro to econ for the non-specialist” books to recommend? I’ve been wanting to increase my knowledge level, but am having a hard time find a good even-handed (i.e., non-partisan) introduction that isn’t a textbook. (I’m a nerd, but not so much of a nerd that I want to read a textbook in my spare time.) I’ve read Freakonomics and The Undercover Economist, but those strike me as novelty more than intro.

    • nicoleandmaggie Says:

      You sure I can’t recommend some texts? Because there are some really awesome ones out there… The two I would recommend are:
      Microeconomics and Behavior by Robert Frank and Public Finance and Public Policy by Jon Gruber.

      The former is a microeconomics 201-level book that does a great job explaining economics as how people should behave compared to how they actually behave. The latter is an amazing textbook that explains the role of government in economics. It is surprisingly readable even if you skip all the charts and math. Current editions also come with a comic book on the Affordable Care Act, which is very clear. I would totes read Public Finance and Public Policy in my free time. :)

      Also, I’ve been meaning to mention this to CPP next time he stops by and gets all Krugmanny on me: Robert Reich probably does the best job of accurately explaining policy from an economic standpoint without getting partisan. Yes, he is a democrat, but he’s also a pragmatist and doesn’t believe that problems will stop existing just based on what he says in the NYTimes. You can catch him all over the place… Huffington post, marketplace radio etc. He’s not technically an economist by training– I think he has a law degree, but he was definitely qualified to be labor secretary and he does an amazing job at explaining things.

      Additionally, the This American Life people have an economics podcast that bores me to tears but DH finds interesting, which means it is probably a good primer. Let me see if I can find it… Ah yes, Planet Money.

      • Cloud Says:

        Thanks! The problem with texts is that I probably can’t get them on the Kindle. But maybe I’ll break down and buy a paper book…. Maybe I’ll start by seeing if Reich has a book. I do usually like his writing. Planet Money shows up on other NPR shows, too. I agree with your DH. :)

      • nicoleandmaggie Says:

        On our last road trip I sat through two of the podcasts and then begged to go back to the Splendid Table. (Podcasts: awesome for long trips through country with little radio reception.)

        p.s. Feel free to get an earlier edition used of the Frank book. The Gruber book may be worth getting a recent edition if you’re interested in applications to current events. (The theory, however, hasn’t changed since the first edition.)

      • chacha1 Says:

        the Gruber book sounds great but is there anything comparable that doesn’t cost $120? :-)

      • nicoleandmaggie Says:

        I think you can get a lot of the substance from it for free from MIT’s open source stuff. (Is it called Coursera? Something like that.) Also if you don’t need to be too up to date on current events, you can get an earlier edition used for cheap. And if you have any affiliation with a university library, it will probably have it.

  8. Practical Parsimony Says:

    Even though English is my academic field, i can sew at the expert level. I really hate reading posts by novices who admit they learned to sew last week. Their instructions are worthless. They do not use sewing terms. Even worse is having one of the novices try her best to teach me in person a new technique (even though I did not ask and can do this anyway), proving the road to poor sewing is paved with good intentions. Even in all kindness, one cannot help them or point out anything new because “I know how to sew.”

    In my field, I ask, “Why did you put a comma there?” or “Why did you use that form of the verb in the sentence.” Worst and most common answers, “Because it looks right.” “Because it sounds right.” It makes me crazy. From their background and performance, these people have no idea that looking right and sounding right are not valid reasons. Their grammar is atrocious and they cannot spell. Really, i do feel sorry for them even though I want to strangle them when they give these answers. And, they tell me in all earnestness that “If I were…” cannot be correct.

    Right now, I am typing lying down because of my back. I have corrected dozens of mistakes, but surely I have left some for you.

  9. chacha1 Says:

    I would have to come back to “health” as to when a little knowledge is worse than none at all. There are a lot of people out there selling snake oil, and consumers who only recognize keywords are buying it. People do themselves a lot of damage trying to self-diagnose and self-treat.

    • Marc Says:

      Statistics! This is definitely a field where a litte knowledge is more dangerous than none. In the biomedical sciences statistical testing has become very important and academic journals will not publish findings that were not evaluated using statistics. However, shall we say, the older more established generation of scientists that do most of the peer reviewing for journals regularly misinterpret and or misuse statistics.

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