naked capitalism

By Jake Romero, an economics student at Portland State University. You can reach him at jvc613 (at) gmail.com

Economics has always been something of a battleground, but in November a group of about seventy Harvard students opened a new front in the ongoing hostilities: its introductory pedagogy. In solidarity with the Occupy movement, the students staged a walkout of their principles course to protest what they called its “inherent bias.”

In his rebuttal in the New York Times, Greg Mankiw countered that his teaching is careful to avoid policy conclusions and that its subject matter falls squarely within the current mainstream of the discipline. Narrowly correct, he nonetheless profoundly missed the broader points that his students, to be fair, seemed unable to articulate fully.

Firstly, one needn’t make explicit policy prescriptions to reproduce, in generation after generation of students, the fetishization of “free markets” that has been eroding civil society worldwide. If not quite a wink and a nod, then an omission here and oversimplification there will do just fine. That’s precisely the tack Mankiw takes in his introductory textbook, Principles of Economics. His approach is surely only in the name of student accessibility, but we all have good intentions, don’t we?

Secondly, it is precisely the mainstream of economics that is complicit in the ongoing economic upheaval and ensuing social unrest we’re witnessing worldwide. Mankiw is correct in pointing out that his textbook is hardly unique, but, to tweak the aphorism, one man’s modus tollens is another’s modus ponens. That Mankiw’s style of teaching basic economics is common is less exculpatory of this style than it is damning of his discipline for almost universally adopting it. If Mankiw wants to quote Paul Samuelson, he should also heed his lament shortly before his passing: “Alas, many textbooks have strayed too far toward over-complacent libertarianism.”

The great irony and tragedy of “intro econ” is that it is at its introductory level that economic theory is both most broadly consumed and most malignantly simplistic. In a recent study, economists at the University of Washington found there to be an “indoctrination effect” for non-majors who take an economics course: on average, they behave more selfishly and hold less regard for others after taking such a course.

Generations of the world’s business people and public policy makers have been nursed on such courses. To gain some insight into why our economies and institutions are crumbling beneath us, then, imagine an engineer equipped with a rudimentary understanding of physics that omits gravity, and a certain above-average disregard for human life not his own. Now imagine him building all the major bridges in the world.

From personal experience, I can attest that a good principles course, taught by someone with a sense of responsibility for her students, can be a mind-expanding experience. Taught by someone else, it can be a profoundly narrowing one. Surely Professor Mankiw would have no trouble agreeing that not all teachers of introductory economics are of his caliber. But, on the one hand, if even someone of his stature can mislead some (most?) students, imagine what’s going on out in the provinces. On the other, the children of the elite have an outsized influence on our culture and institutions. Perhaps some arrive to Ec 10 precociously predisposed to “over-complacent libertarianism,” but, given their likely future influence, isn’t that all the more reason to challenge their biases?

The typical introductory economics course, taught carelessly, corrupts even as it enlightens. With a rhetorical sloppiness that turns mathematical idealization into socially destructive ideology, it compels the naive reader to think like a “rational actor,” without offering any caveat about how doing so undermines community, stifles creativity, enervates leadership, and licenses greed.

Like Occupiers more generally, the students of “Occupy Economics” may not have been able to make the best case for their action, but they were smart enough to recognize a good intuition when they sensed it. By providing an occasion for reflection, they’ve succeeded in reminding us that the manner in which economics is taught can make it easier or harder to abuse economic theory in ways that perpetuate the greed and underwrite the shamelessness of the one percent.

We’re now reaping the bitter harvest of generations of this kind of corruption—gross inequality, debased values, a corroded civil society. It now falls on a new generation to resist, combat, and ultimately root out such insidiously pervasive abuses of the language and logic of the market.

As illustration, let’s spend some time in the interstices between economic theory and economic reality to point out a few things to keep in mind if you’re an economics student who wishes to retain his conscience, or just someone who values intellectual responsibility:

Ten Principles of Responsible Economics

1) In theory, rational people think at the margin. In reality, these people are a fiction that exist only in mathematical models

You are not a “rational” actor—not in the economic sense of the term. The newcomer to economics, well-intentioned as she is, surely wants to be rational in the everyday sense. Having learned from her textbook that, without qualification, to be rational is to be a self-interested utility-maximizer, she learns to emulate such behavior. So begins the process of learning to deprecate non-market values—which are “irrational,” after all—and rely exclusively on self-interest to justify and understand action. This naive economism’s implicit justification for selfishness is that acting in one’s self-interest at the margin is “only rational.” Inside the fictional world of an economic model, this is tautologically true. Outside of it, we still call that sociopathic greed.

2) In theory, there is no difference between self-interest and greed. In reality, economists aren’t typically trained in moral philosophy

Spend enough time studying economics, and you might eventually feel greed become empty of meaning. You’ve learned that acting in your own self-interest is not only rational but virtuous—it creates better outcomes for everyone—and surmised that greed is perhaps merely an expression of envy or an atavism from a benighted age of religious taboo. You would be wrong. In the real world, greed exists. As a crude approximation: acting in your own self-interest just means “not shooting yourself in the foot.” You can think of greed as shooting the other guy in the foot so you can get away with his wallet.

3) In theory, voluntary trade can make everyone better off. In reality, it’s often not so voluntary, makes some people better off while making others worse off, and empowers the beneficiaries to make sure they get to keep their gains

“Free market” reforms generally improve aggregate outcomes while increasing inequality, so that poverty increases even as overall wealth does. Basic economic analysis treats distribution as a secondary concern—it assumes that once the market maximizes benefits in the aggregate, the political system can ensure that they’ll be redistributed in an equitable way. But as we’ve been learning all too well, with greater wealth comes greater control over the political system.

4) In theory, markets are usually a good way to organize economic activity. In reality, “markets in everything” has a way of sliding into “everything into markets”

There’s a difference between thinking about a real-world interaction as if it were a market—market analysis—and transforming that real interaction into an actual market—marketization. The latter is a natural seduction once you’ve gained some facility with the former, and some people seem to reflexively think organizing any activity as an actual market would be an improvement over the status quo. We can think of these people as blowtorch-wielding pyromaniac children playing in a barn, but they are not, of course, actually blowtorch-wielding pyromaniac children playing in a barn.

5) In theory, market models assume that the existing distribution of wealth is just. In reality, poor people exist

Hiding in plain sight in many marketization proposals is something of a dirty little secret: When you apply an idealized market model to the messiness of reality, some people, those without enough purchasing power to enter the market in the first place, will have to go without in the name of efficiency. Famine, thirst, and lack of access to education can be effective market solutions.

6) In theory, people respond to incentives. In reality, different people respond differently to different incentives, and not always the way you hoped for

“Pay for performance” is sold as “more money for better results” but typically results in “gaming the metrics to get that cash money now.” The people who respond best to monetary incentives are the people who value money the most, not necessarily the people who value education or innovation or whatever you’d like them to value the most. Such incentive schemes also tend to result in sacrificing long-term or substantive success in favor of superficial short-term gain.

7) In theory, governments can sometimes improve market outcomes. In reality, sometimes sometimes means often

Real markets are always imperfect and intrinsically tend toward monopoly, a market failure. Introductory textbooks make note of such market failures, but typically only in a way that makes them seem like outliers. They are in fact the norm.

8) In theory, there’s a distinction between “positive” and “normative” economics. In reality, the positive is at once fictional and normative in effect

Ostensibly, “positive” economics refers to the description of economic reality—the “is” questions–while normative economics deals with policy prescriptions—the “ought” questions. But in the context of neoclassical economics, the only reality we have access to is a set of rather crude idealizations—in a sense, we study the reality of a fiction—and since studying positive economics clearly has an effect on people’s behavioral patterns, it is de facto normative.

9) In theory, models are just aids to reasoning—the map is not the territory. In reality, it’s just so easy to reify

Many lesser economists have a habit of justifying the strong modeling assumptions of economics by claiming they’re “generally true” or excusing them with a wave of the hand and a “well, there are always exceptions, right?” This is a telltale marker of someone who takes his models too literally. Properly understood, the toy models of economics are tools for organizing thought, testing intuition, and generating sets of hypotheses to be tested against data—not objective descriptions of reality.

10) In theory, economics is a science. In reality, economics is a science the way Ayn Rand is a literary luminary

To casually label economics a science is at best aspirational, at worst manipulative, at a minimum misleading. At the introductory level, the issue at stake is less one of methodology than of how deferential the layperson or novice should be to the authority of expert or policy entrepreneur appeal to economic theory. Skepticism is always a virtue. When evaluating claims based on simple economic models, it’s self-defense.