An Inoculant Against Simple-Minded Myths

by Don Boudreaux on November 28, 2015

in Curious Task, Economics

Here’s a letter to a long-time patron of Cafe Hayek:

Mr. Kevin Martin

Mr. Martin:

Recollecting that your Econ 101 course at Rice portrayed the world as “pretty simple,” you ask me to elaborate on my claim that a good Econ 101 course “is all about revealing reality’s complexities.”

Your Econ 101 course seems very different from the one that I teach.  My course – which I (perhaps conceitedly) believe is one that economists such as Milton Friedman, F.A. Hayek, and Thomas Sowell would describe as a good Econ 101 course – uses straightforward economic analysis to dispel simplistic yet widely held notions about the economy.  The typical student entering my class simple-mindedly believes such popular myths as that

– prices and wages on markets are simply “set” by businesses;

– steep increases in the prices of fuel and bottle water in the aftermaths of natural disasters are caused simply by “greed,” and that government-imposed prohibitions on such “price gouging” simply make these goods more affordable and accessible;

– rent control obviously makes apartments more affordable;

– a hike in the minimum wage is a simple and obvious way to help all low-skilled workers;

– stricter government safety regulations obviously make people safer;

– imports from low-wage countries obviously reduce average wages in the U.S. or reduce overall employment in the U.S. (or both);

– trading with foreigners is of course economically different than trading with fellow citizens;

– taxes are obviously paid by the individuals and businesses that government makes responsible for paying the taxes;

– of course the chief source of economic strength and growth is consumer spending, and reductions in consumer spending are inevitably harmful;

– the interests of businesses are obviously at odds with those of consumers and workers;

– advocates of laissez faire simply are “pro-business” and (hence) “anti-consumer” and “anti-labor”;

– of course the rich get richer and the poor get poorer;

– government officials’ chief intention, of course, is to improve the well-being of the public;

– the consequences of any action are simply determined by the intentions of the actor.

If I do my job well, by semester’s end each of my students understands that the world is far more complex and reality less “obvious” than he or she believed it to be at the semester’s start.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

I add that my goal when I teach this course isn’t so much to dispel these and other myths as it is simply (!) to teach a good intro-to-economics course.  But among the inevitable effects of such a course taught well is the dispelling of these and other popular, simple-minded myths.

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Quotation of the Day…

by Don Boudreaux on November 28, 2015

in Inequality, Seen and Unseen, Work

… is from pages 228-229 of the 1975 collection of some of Harry Johnson‘s essays, On Economics and Society; specifically, it’s from Johnson’s 1973 contribution “Inequality of Income Distribution and the Poverty Problem”:

Apart from these forms of social discrimination, contemporary society contains important forms of discrimination on other grounds, nominally economic, which help to create a poverty problem.  One such is trade unionism, which by establishing a different wage for union members over nonunion members helps to keep the nonunion members poor.  Another is minimum wage laws, which benefit those fortunate enough to obtain employment in minimum-wage-law industries at the expense of those not so fortunate.

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A Timely Note On Supply and Demand Analysis

by Don Boudreaux on November 27, 2015

in Economics

David Henderson, over at EconLog, does a very nice job at exposing some of the flaws in Noah Smith’s criticism of Econ 101.  Here’s a comment (with typo corrected) that I left on David’s post:

David: Nicely done.

I’m sure that most people who teach principles of microeconomics do what I do in class when I explain the effects of price changes on quantity supplied and quantity demanded: I offer, in the course of this discussion, an analysis of elasticity. (Having once used Mankiw’s text in my classes, I know that he does so, too.) I make clear to my students three points that are relevant here:

First and most trivially, supply and demand analysis – as is true of all analysis – requires judicious use of ceteris paribus assumptions.

Second, supply and demand analysis itself tells us only about the direction of changes and not about the magnitude of changes. “A rise in the price of apples reduces the quantity of apples demanded each month” is a typical statement that is correctly made using supply and demand analysis. I make crystal clear to my students that in order to discuss the magnitude of the resulting fall in quantity demanded requires an understanding of own-price elasticity of demand. It is careless for Noah Smith to suggest that the possibility of highly inelastic demand as a feature of reality renders supply-and-demand analysis wrong, misleading, or unhelpful.

Third, when discussing elasticity I – like, I’m sure, most other econ-principles profs – explain that one of the determinants of elasticity is time. Specifically, both demand and supply are more elastic the longer the amount of time is available to adjust to price changes. I typically even use the minimum wage as an example, explaining that most of the jobs that are likely destroyed by a higher minimum wage are not destroyed immediately but, instead, are destroyed (or are not created) over time as employers have more time to adjust to the new, higher wage. And I do all this explaining not in a way that implies that differences in elasticity across outputs, across inputs, and across time somehow diminish the explanatory power of supply-and-demand analysis but, instead, as an integral part of making supply-and-demand analysis as explanatory as possible.

I add here that when I teach supply-and-demand analysis I always label the horizontal axis “Qty./t” – in order to make clear to my students that the quantities demanded and supplied are quantities demanded and supplied “during some specific period of time” such as “per day” or “per year.”  Changing “t” changes the elasticity of both demand and supply.  Any professor who teaches supply and demand in a way that implies that the elasticity of demand and the elasticity of supply are invariant to time, or who otherwise implies that time is not a relevant-enough factor to account for when doing supply-and-demand analysis, is a very poor professor indeed.  Such a professor is, as the always-insightful Jon Murphy suggests in another comment on David’s post, one who ought to refund to his students the tuition they paid for his faulty instruction.

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… is from page 62 of my late Nobel laureate colleague Jim Buchanan’s pioneering February 1962 article in Economica, “Politics, Policy, and the Pigovian Margins,” as this article is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty:

Indeed, economists tend to be so enmeshed with efficiency notions that it seems extremely difficult for them to resist the ever-present temptation to propose yet more complex gimmicks and gadgets for producing greater “efficiency.”

As Jim suggests, it is deeply regrettable that so many of those people who are expert in the profession – economics – that traces its modern origins to the analysis and wisdom of Adam Smith have never learned, or have forgotten, Smith’s criticism of the hubris and ignorance of the man of system:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

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Quotation of the Day…

by Don Boudreaux on November 26, 2015

in History, Property Rights

… is from John Stossel’s November 25, 2014, column, “This Thanksgiving, Be Grateful for Property Rights. The Pilgrims Nearly Starved Without Them“:

People associate property rights with greed and selfishness, but they are keys to our prosperity.  Things go wrong when resources are held in common.

Before the Pilgrims were able to hold the first Thanksgiving, they nearly starved.  Although they had inherited ideas about individualism and property from the English and Dutch trading empires, they tried communism when they arrived in the New World.  They decreed that each family would get an equal share of food, no matter how much work they did.

The results were disastrous.  Gov. William Bradford wrote, “Much was stolen both by night and day.”  The same plan in Jamestown contributed to starvation, cannibalism, and death of half the population.

So Bradford decreed that families should instead farm private plots. That quickly ended the suffering. Bradford wrote that people now “went willingly into the field.”  Soon, there was so much food that the Pilgrims and Indians could celebrate Thanksgiving.

A longer treatment of this historical episode is in Yale law professor Robert Ellickson’s now-classic 1993 Yale Law Journal article “Property in Land.

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Here’s a letter to a Facebook commenter:

Mr. Craig Bolton

Mr. Bolton:

If I read you correctly you share Noah Smith’s assessment that Econ 101 courses present overly simplified views of reality – views that are improved by advanced economics courses that (in your words) “account for some real world complexities.”

Whatever the merits or demerits of advanced courses in economics (themselves largely determined by who teaches such courses), it is a mistake to accuse Econ 101 of necessarily presenting an overly simplified view of reality.  Indeed, good Econ 101 courses have it as one of their chief purposes to immerse students in real-world complexities.

In a good Econ 101 course (such as is taught at George Mason University), students learn that most of what passes as sensible economic commentary by politicians, pundits, and preachers is but a torrent of extraordinarily simplistic myths.  In a good Econ 101 course, students learn to peer beyond and behind the surface phenomena that most non-economists simple-mindedly presume to constitute the whole of economic affairs.  After completing a good Econ 101 course, students understand that the economy is far too complex for the tinkering and social engineering that is routinely advocated by elected officials, academics, and “activists” to succeed.

It is not a stretch to say that no collegiate course does more to reveal to students the complexities of reality than does a good course in Econ 101.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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Most of What You Learn in Econ 101 is Right

by Don Boudreaux on November 25, 2015

in Curious Task, Economics

Several people have asked me to weigh in on Noah Smith’s recent essay entitled “Most of What You Learn in Econ 101 Is Wrong.”  In a sense I have already done so, in two posts from a few weeks ago.  They are here and here.

While not written in response to Smith directly, these two blog posts of mine were indeed written in response to the argument that Smith makes, for it is an argument frequently offered by those who resist the counsel of humility that a good principles-of-microeconomics course rightly instills in its students.

I don’t now have much worthwhile to add to what I wrote a few weeks ago, save to note that not all courses in principles of economics are taught well.  Many such courses are extended and rather mindless discussions of how to bend curves and how to do math that is asserted to describe economic relationships. (And many of these wrong-headed courses in economics principles do indeed teach lots of wrong notions, such as that markets require perfect information in order to work well, or that “perfect competition” would be the best kind of competition in reality if it were possible.)  So, yes, most of what is taught in those kinds of intro-“economics” courses is indeed “wrong” – or, at least, irrelevant to a true understanding of economics.


But a well-taught principles course – a course taught, for example, by the likes of Deirdre McCloskey, by my colleague Walter Williams, by Dwight Lee, or by the late Armen Alchian – is one that teaches, and teaches well, at least ten vital foundational lessons: (1) the world is full of both desirable and undesirable unintended consequences – consequences that are largely invisible but that even a course in ‘mere’ principles of economics gives us great vision that enables us to “see,” (2) intentions are not results; (3) our world is unavoidably one of trade-offs and not “solutions,” (4) market-determined prices (4a) are not arbitrary, (4b) connect millions of strangers to each other in productive ways that almost none of these strangers are aware of, and (4c) cannot, save under the rarest of unrealistic circumstances, be controlled by government without causing consequences quite the opposite of those that are ostensibly desired, (5) productive and sustainable complex economic order emerges without design or intention, (6) individuals respond to incentives, (7) individuals, and not collectives, choose and act, (8) wealth is not fixed in amount (and it is not money), (9) government officials are no smarter or better-motivated than are people operating in the private sector, and (10) the economy is inconceivably more complex than someone with a poor understanding of economics realizes – so complex that the promises of social engineers are revealed to be fantastic delusions.

A good principles-of-economics course teaches us to appreciate the marvels of the spontaneous market order and, in doing so, teaches humility.  Sadly, far too many advanced courses in economics teach the opposite: by their whiteboard rendering of economies as GDP-producing machines, such “advanced” courses instill the mistaken notion that economies are far simpler than they really are.  It would be much closer to the truth to say that most of what you learn in Econ 800 is wrong, for in too many cases it dilutes or destroys the truths you learned in a good Econ 101 course.

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Writing in Playboy, my colleague Alex Tabarrok exposes the hypocrisy, historical and economic ignorance, and immorality of those Americans – disproportionately Republican, take note – who today fear immigrants from Syria.  A slice:

We also have much to gain from refugees. Andras Grof was one of the Hungarians who fled Soviet tanks in 1956. He later changed his name to Andrew Grove, and as co-founder of Intel he became one of the legendary innovators of Silicon Valley. You can’t get more American than that. Immigrants have helped to make the U.S. economy the most dynamic and admired in the world. The United States can easily take in more refugees than we are now admitting without suffering economic problems. Indeed, far from being hurt by the influx of millions of refugees, the Turkish, Lebanese and Jordanian economies are growing.

Welcoming more refugees is not only an act of compassion, it’s also good foreign policy. The fear that ISIS is trying to instill in the West is not simply a fear of ISIS but a fear of all Muslims. The tiny terror cult believes that by driving a wedge between Muslims and the West it will convince the world that it represents all Muslims. When politicians like Gov. Christie brand an orphan Muslim child as an object to be feared, they are helping to spread the message that ISIS wants to be heard. Welcoming Syrian refugees strikes a blow against the barbaric caliphate in Raqqa by uniting us all in common cause against our true enemy.

In the Wall Street Journal (gated) Michael Shermer reviews Matt Ridley’s new book, The Evolution of Everything.  A slice:

Mr. Ridley’s opus will not be well received by those who believe they are smarter than the masses, who think that most people are not capable of self-governance, who fancy themselves as intelligent social designers, or who simply have a hard time imagining non-command-and-control solutions to problems. Yet there is something profoundly democratic and egalitarian—even anti-elitist—in this bottom-up approach: Everyone can have a role in bringing about change regardless of intelligence, education, family background, socioeconomic class, race, religion, gender, sexual orientation or any other category by which we are wont to divide ourselves. In self-organizing emergent systems anyone can participate and make a difference.

Richard Rahn is thankful for the life-giving bounty of economic growth.

Aniruddha Ravisankar pens an open letter to “Progressives.”  A slice:

You are right to demand that we be sympathetic to the sufferings of other people and hold up altruism as a virtue. But what is more altruistic than capitalism, which cares not for the color of your skin or your hair but for you as a person? How can you, with such concern for the world’s poor, rally against the international trade that will make their lives better? Isn’t there something incredibly regressive about wanting to slow down capitalist progress? Every agricultural subsidy and tariff we erect makes it harder for farmers in the poorest countries to sell their crops to us.

Jon Murphy weighs in on Noah Smith’s recent attempt to justify government restrictions on low-skilled workers’ rights to compete for jobs.

The great Harvard historian Richard Pipes is the winner of the 2015 Bruno Leoni Prize.  Here’s a video of the talk he gave upon receiving this award.  (I take this opportunity to again remind readers of Pipes’s remarkable 1999 volume, Property and Freedom.)

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… is from page 492 of Armen Alchian‘s 1975 essay “An Introduction to Confusion,” as reprinted in The Collected Works of Armen A. Alchian (2006), Volume 1 (“Choice and Cost Under Uncertainty”); this essay is Alchian’s insightful response to the Final Report of the Energy Policy Project of the Ford Foundation (original emphasis):

Reduced energy use does not necessarily improve the environment.  On the contrary, greater use of a greater supply of energy could be an effective means of improving (not just preserving) our surroundings.  While energy production may injure the quality of some natural resources in some areas, cheaper, more plentiful energy permits improvements in other areas (possibly even the energy production locale).  Air-conditioning improves our environment (in a sense); more gasoline for engines with lower mileage but greater effectiveness in curtailing pollutants would also help; pumping water to arid areas (by means of energy) makes the desert bloom.  The correct issue is the optimal degree and type of pollution, the optimal mix of environmental effects, the optimal degree of personal abuse via work or loss of leisure.  Despite the Report’s seeming bias in favor of energy reduction, nowhere does it actually demonstrate that decreased energy growth or a return to our original environment is the ideal objective.

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Douglass North (1920-2015)

by Don Boudreaux on November 24, 2015

in Economics

Another great economist has died.

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