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?