Gernot Wagner is the author of But Will the Planet Notice? How Smart Economics Can Save the World. He teaches at Columbia University and is an economist at the Environmental Defense Fund.
Five years ago, top Harvard College graduates flooded Wall Street. They were small cogs in a race-car engine, except the car was speeding over a cliff. It’s no wonder that today’s graduates are reconsidering their career choices.
They should start with economics.
When most people think about economics, their minds turn to business and finance. But economics goes beyond these fields, and the difference between business and economics goes beyond size. Economics is about a way of thinking.
Wal-Mart, for example, has roughly two million employees, more than the population of some fifty countries. Success in business, for Wal-Mart, or any company, is about navigating the rules of the game at hand. Economics is about setting the rules in the first place. That requires both a different toolkit and a different worldview.
It has become acceptable, in casual conversation, to say that markets don’t work. The demise of Lehman Brothers and the subsequent swoon of the global economy are often cited as evidence. The next time you hear someone say this, you can tell them they’re wrong for two reasons: Lehman Brothers is more a symptom of what happened rather than the underlying cause, and it was guided by much larger forces than itself. Markets, in fact, work all too well. They are an aggregator of wishes and desires, however misguided they may be.
Chuck Prince, the former CEO and chairman of what was once the world’s largest bank, was right when he uttered these famous words shortly before his resignation: “As long as the music is playing, you’ve got to get up and dance.” Place the emphasis on “you’ve got to.” Legislators and regulators, in their finite wisdom, had erased many of the existing checks and restrictions—those few, rickety road signs pointing in different directions. Their actions lit a fire under Prince’s and other bankers’ feet.
This is not to vilify Prince. He had it right. Bankers should be dancing to the music. That’s what they’re paid to do (and very well at that). It’s also the core lesson they’re taught in business school: Find the best ways to navigate the current system and make a buck or two in the process.
It’s up to the rest of us to find the right rhythm. That’s where economics comes in.
The caricature of economists is one of free market apologists. It’s understandable. One need only look at Alan Greenspan and others who hew too closely to Ayn Rand’s fictional characters. But this caricature is also unfortunate.
Today, we are far from having anything approaching a free market. Fossil fuel subsidies and various other loopholes and distortions make the playing field uneven. More significantly, we violate one of the most basic tenets of economics, that there is no free lunch. In reality, it turns out, we all get a steady stream of free passes.
It starts in the financial sector, where the benefits of bankers’ actions are often and almost entirely privatized: They pocket the bonus if the bet pays off. But the costs are socialized: Bankers pay but a tiny fraction of the costs of their failed bets; society pays. The fundamental mismatch, as evidenced by the collapse of Lehman Brothers, has enormous consequences for the rest of us.
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