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.