A Book That Needed To Be Written

By James Kwak

I have previously written about (here, for example) what I call economism, or excessive belief in the little bit that you remember from Economics 101. The problem is twofold. First, Economics 101 usually paints a highly stylized, unrealistic view of the world in which free markets always produce optimal outcomes. Second, most people in the world who have taken any economics have only taken first-year economics, and so they never learned that, from a practical perspective, just about everything in Economics 101 is wrong. (Complete information? Rational actors? Perfectly competitive markets?) This produces a nation of people like Paul Ryan, who repeats reflexively that free market solutions are always good, journalists who repeat what Paul Ryan says, and ordinary people who nod their heads in agreement.

The problem is not the economics profession per se. These days, to make your mark as an economist, it helps to be arguing (or, better yet, proving) that the free market caricature of Economics 101 is wrong. The problem is the way it is taught to first-year students, which pretty much assumes that Joseph Stiglitz, Daniel Kahnemann, Elinor Ostrom, and many others had never existed.

What we need, I have often thought, is a companion book for students in Economics 101, one that points out the problems with the standard material that is covered in the textbook. For a while I was thinking of writing such a book, but I decided against it for a number of reasons, one of them being that I am not actually an economist. Fortunately, John Komlos, who really is an economist, has written a book along these lines, titled What Every Economics Student Needs to Know and Doesn’t Get in the Usual Principles Text.

Komlos’s book takes aim at what he calls “market fundamentalism,” the ideology that markets are always good. Like all successful ideologies, market fundamentalism pretends not to be an ideology, which is why it likes to dress up in mathematical equations. But as most people in most other social sciences would agree, ideology is inescapable. Komlos is explicit about his: the goal of economics should be to improve people’s quality of life, which includes the ability of people to live meaningful lives. He also seems to agree that there is nothing wrong with the field of economics in itself: the problem is that many of the most important developments in economics have been left out of introductory courses and textbooks. The result is that “most students of Econ 101 . . . are never even exposed to the more nuanced version of the discipline and are therefore indoctrinated for the rest of their lives” (pp. 10–11).

Most of the book after the first couple of chapters presents specific criticisms of the basic models presented in Economics 101. Chapter 3, for example, discusses the problems with assuming that consumer demands are exogenously determined and that indifference curves are smooth and reversible (that is, ignoring the fact that we experience loss aversion in considering changes in consumption levels). Chapter 4 summarizes the evidence against the assumption of the rational decision maker and discusses what that means for the principle of utility maximization. And so on.

The book covers a lot of topics, many of which could warrant much further discussion. But it should do an excellent job at its primary mission: showing first-year students that most of what they learn cannot be applied in the real world, at least not without significant modification. The world is a complex, messy place, and markets are complex, messy institutions like any others. The more people learn that lesson, the better.

28 responses to “A Book That Needed To Be Written

  1. Great recommendation. Thank you.

    I would think however that pointing out the flaws of markets is not strictly necessary for a rational individual that is educated about what markets actually are, how they function, their limits, and how their context influences them. Many years ago looking for such a book, I read a book called The Natural History of Markets or some such, and appreciated that at the least an attempt was made in that book to demystify markets.

  2. Maybe Grew Mankiw never made it past his own Intro to Econ text??

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  4. Smart Donkey

    Ah, we should educate our demagogues better (or the demos?)

    [Komlos] also seems to agree that there is nothing wrong with the field of economics in itself: the problem is that many of the most important developments in economics have been left out of introductory courses and textbooks.

    Definitely on the wrong track if that’s what he thinks. Fraud at the highest level not prevented by legions of PHD’s demonstrates that education is likely a problem.

  5. Bill O'Brien

    Economics 101 is fundamentally correct…what needs to be understood is that the hand on the economy’s rudder isn’t Adam Smith’s “invisible hand”, but the hands of those who rig the markets for their own enrichment…regardless of the outcomes. Perhaps we need “Economics 101: Theory vs Reality”.

  6. Maybe an AA like program to rehabilitate war lords? I’ll write that book.

    Plus, only good jobs to create social relief from psychobabble explaining politics. And why do you want to rule the world? What qualifies you for the position?

    And how about all that garbage coming in from the tsunami? That’s a big job. Or is it not entre-pre-nurial enough of a project for beating swords back into ploughshares? Get all those geeks out of the office in SillyCon Valley and out identifying what’s coming onshore….? They look like they could use some sunlight….

    Mix and match it all up, it still works like it is supposed to where trade replaced war in the 21st century….creative financial instruments – what Bill O’Brian said….rig the markets for enrichment, not “their own” enrichment…with FIAT $$$$ no less – THAT theory….

    The “solve the problems” portion of the program has begun – what is that “Economics 606″?

  7. Thanks, James, for the useful review and recommendation. While we’re talking about books that discuss how economics really works, I look forward to reading what you and Simon have to say about Thomas Piketty’s “Capital in the Twenty-first Century.” It’s received some pretty heady reviews and promises to add important historical insight into the inequality issue.

  8. Not being part of academia, I stumble over the phrase “ideology is inescapable”. Is that really the default view? Because I am coming to the conclusion that in a world without communism the word “ideology” is not just obsolete, it’s dangerous. No one actually acts like they have a coherent set of non-falsifiable beliefs that guide their views. So why do we talk like they do? I’ll tell you why, because “ideology” generally contains a set of false beliefs about how the world works, the belief in which benefits the rich/powerful and hurt the poor/powerless. Just try writing down what you take to be Paul Ryan’s “ideology”. What you end up with is a list of false statements.

  9. We already had such a text, and it was first published almost 20 years ago: “Everything for Sale,” by Robert Kuttner.

  10. I got a B.A. (not a B.S.) in economics from the George Washington University in 1949. Fortunately, guys like you and Simon and Stiglitz are around to set me straight.

  11. Smart Donkey

    Re Mr. Hall:
    “No one actually acts like they have a coherent set of non-falsifiable beliefs that guide their views.”
    They certainly act like they’re non-falsifiable. Even when they are falsified they act like it didn’t matter.

    Their ideology is dangerous, more dangerous because it’s disingenuous. Even more frightening is the apparent belief that disingenuous ideologies are necessary from here on out. “Ideology is inescapable” is their euphemism.

  12. Earlier books covering some of the same ground:
    “The Economics Anti-Textbook”, Hill and Myatt, 2010;
    “Debunking Economics, Revised and Expanded Edition”, Keen, 2011.

  13. TerryH beat me to it with “The Economics Anti-textbook,” an excellent book. I recommend, as well, “The Assumptions Economists Make” by Jonathan Schlefer and several academic papers by Deidre (or Don) McCloskey (professional economist who changed gender). McCloskey’s work centers largely on Economics as normative narrative rather than positive science. “Micro Motives and Macro Behavior” by Thomas Schelling (Nobel Prize winner primarily for his work in this area) will surely open your eyes to a different view of the “efficient/effective markets hypothesis” (the belief that individuals acting in their self interest produce collective outcomes that are optimal for society taken as a whole).

  14. I also recommend Piketty’s Capital in the Twenty-first Century”. I’m only about 200 pages into it, but, if you have a Kindle or Nook, you should, at the very least, read the Sample (which includes the Introduction, an excellent summary of the book’s ideas and data).

  15. Mr. Hall: I’m not sure you meant, “Nobody actually acts like they have a coherent set of non-falsifiable beliefs that guide their views.” Are you sure you didn’t mean, “Nobody actually acts like they have a coherent set of falsifiable beliefs that guide their views”? Quite a bit of research and simple informal observation of individual human behaviors in public discourse should convince one that data doesn’t impact our core views. In a recent study (Pew Research Center?), the sample was asked, “Can you recall ever changing your opinion after discovering new data?” Americans overwhelmingly (more than 80%, for sure, as I recall) responded in the negative. A group that I find especially amusing, if not terrifying, is the 40+% of Americans who believe that the Earth was created in seven days less than 10,000 years ago.

    Sadly, this idea that data doesn’t matter (a little strong…) is an apt description of too much academic and consultative economics and virtually all public policy economics as practiced by journalists, elected office holders, judges (worst of all, several SCOTUS judges), lawyers and, well, voters in state and local elections. The social sciences and their tools (the survey, the experiment and statistical analysis) are rarely understood and, as a result, almost always misrepresented and misused (if not abused) in the general news media, the state legislatures, the US Congress and the courts.

  16. Charles Broming

    My final comment: James, you cited “i am not an economist” as a reason to decide against writing such a book. I think you have that backward; you would write a better such book than most economists because you are not an economist. Lucky for us, there are economists with the courage to question the received orthodoxy publicly in a systemic way.

  17. You could read these books, but you could also look out your window. Efficient allocation of resources as is being done to deal with climate change. Rational consumers not affected by advertising. Free markets with government involved with markets all the time with subsidies and laws, not just with enforcing contracts and maintaining order. And, free markets controlled by monopoly corporations whose economies are as big as the economies of governments. Eco 101 is indoctrination.

  18. Also don’t overlook the new statecraft of economic disruption and/or addictive dependency; common “forces” all aren’t what they use to be.

  19. ‘Komlos’s book takes aim at what he calls “market fundamentalism,” the ideology that markets are always good.’

    Even Milton Friedman and Hayek didn’t think that ‘markets are always good’. They recognized that they usually produce and distribute goods and services more efficiently than any other method.

  20. Every good teacher emphasises the importance of hypothesis in a model, no matter the course. I don’t think that trying to get rid of them before the students have a full understanding of the 101 material is a good idea, because they make it a lot easier to understand the basic concepts, the same way you don’t throw your physics students deep into general relativity before covering special relativity.

  21. When is the reality of “Fiat$$$$” issued as debt going to come up in class?

    “….In modern economies, relatively little of the supply of broad money is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.[22] The manufacturing of new physical money is usually the responsibility of the central bank, or sometimes, the government’s treasury…..”

    Is 10% in circulation enough to pay back the debt? Here come the clipboard guys to stuff a pill down Grandma’s throat and throw her out of her LONG PAID FOR house – someone gave them fraudulent paperwork that she did not pay the city taxes.

    Russia is fine with using their ruble instead of “fiat debt”….hmmmm…..looks like a clash of global “visionaries” is the most interesting competition shaping up – Putin vs. Zuckerhoard….? Mother Russia vs. the Fiat Mother Ship?

  22. Meanwhile, history keeps being written.

    http://calvinayre.com/2014/03/26/poker/sheldon-adelson-treats-republican-presidential-candidates-to-a-game-of-poker/

    Can I dress up Christie to look like a Wisconsin Beer Maiden for the swimsuit part of the competition? Guys seem to want to throw that in – cross-dressing….heck, it’s the only way Christie has a chance of medal-ing in the competition for Sheldon Adelson’s 100 million war kitty support – to do what, though, for Sheldon? Some war or other….?

    Putin has so many more options to take advantage of the Millennial Generation. No one over there is planning on using up all the gas and oil before they make a switch to the big unknown known energy. So ahead of the game, USA is eating dust. ….

  23. “What we need, I have often thought, is a companion book for students in Economics 101, one that points out the problems with the standard material that is covered in the textbook.” –could not agree more. I always hated economics classes at University, primarily because they were so idealistic it seemed a waste of time to even study the material.

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  26. I read with great interest the book “Economics for the Rest of US”by Moshe Adler: http://www.amazon.com/Economics-Rest-Us-Debunking-Science/dp/1595586415. My comments are completely in line with this piece. We do need an antidote to the simplistic guff which is taught in econ 1, and Adler’s book did it for me.

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