- Cafe Hayek - https://cafehayek.com -

Knowing About Economics and Knowing Economics

Tweet [1]

There are people who know a fair amount, or even a great deal, about economics.  To know a lot about economics, however, is not to know economics; it’s not to know how to think like an economist.

Someone who knows a lot about economics has learned a lot of economic jargon (e.g., “marginal cost”) and all of the textbook definitions (e.g., “Marginal cost is the addition to the producer’s total cost caused by the production of one additional unit of output”).  This person also has memorized the often-intricate rules for how to bend and shift various ‘curves’ such as supply, demand, cost, and IS-LM.  And, today, this person is often also skilled at finding quantitative data and processing them in the various data-processing machines that are called econometric techniques.

Knowing how to think productively like an economist is typically assisted by knowledge of such things, but it involves far more than knowing the above.  Indeed, knowing the above isn’t as essential as the typical economist today supposes it is to being a genuinely good economist.  Too often, mastery of superficial stuff such as the above convinces those who have mastered these superficialities that they understand economics.  The sorry result is that such people never bother to master the skill of actually doing economic analysis properly.

Imagine someone who memorizes a world-class cookbook.  This person learns all the culinary jargon; all the formulae for all the soups and sauces; all the cookbook-appropriate combinations of spices; all the recommended oven temperatures for all the different baked dishes.  This person masters all the recipes and information printed in the cookbook.  What this person really ‘learns’ from the cookbook is that preparing meals is a geeky feat of engineering: faithfully follow the recipes of the ‘best’ cookbooks and you are thereby a superb cook.  Voila!  Cooking gourmet meals is easy if one masters the recipes!

What this cookbook student never learns, though, is that being a superb cook ultimately requires individual judgment, wisdom, and creativity in knowing when to stick with a recipe and when sticking with a recipe will produce a meal unfit for tonight’s dinner guests.  What this cookbook student never learns is how to create delicious meals for which there is no already-printed recipe.  This cookbook student, in short, masters, at best, only that which a skilled chef can explicitly commit to paper; this cookbook student – being in fact quite dull – never masters the creative art of cooking.

Lots of economists, in my view, are like this dull cookbook memorizer.  They sling the jargon freely; they know, and can recite flawlessly, all the latest recipes (that is, models).  They can name those recipes’ creators (that is, today’s in-vogue economic theorists).  They know a lot about economics.

But when they actually attempt to do economics, it quickly becomes clear that they don’t know what they’re doing.  They’re not really economists.  They consistently fail to ask that most important of all questions that economists ask: “As compared to what?”  They forget that monetary costs and monetary benefits are only a subset (and sometimes a small subset) of full costs and benefits: They mistakenly suppose that monetary costs and benefits are all of the relevant costs and benefits.  They, in the most wooden of ways, take the recipes they know literally: Any observed real-world variations from the cookbook (that is, textbook) recipes are, for such economists, solid evidence that the real-world is flawed.

The fact that reality is far richer in details – the fact that competition operates on many more margins than are included in economists’ formal models – the fact that people, as consumers and as producers, are indescribably more creative and clever and intrepid and diverse than are the ‘agents’ who populate economic models – the fact that maximizing the collective monetary incomes of some arbitrarily defined group of people (for example, “low-skilled workers” or “blue-eyed people whose last names start with the letter Z”) is likely to be both positively meaningless and normatively dubious – these facts are invisible to too many modern economists.  This blindness to the most important features of economic reality is promoted by the failure of modern economic training to teach young economists to ask, always to ask, why.

Such questions can be greatly multiplied.  Just as knowing a lot about cooking does not mean knowing how to cook well, knowing a lot about economics does not mean knowing how to think clearly and creatively as an economist.