“I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks.” — Paul A. Samuelson
What is the socially optimal amount of pollution in the United States?
Imagine that you can command all of society’s existing resources, directing them as you see fit. Your goal is to make everyone as well off as possible. How much pollution will exist in the best case? Are we better off with as much pollution in 2017 as in 2016? With half as much? With none at all?
This question is asked in economics 101 every year. “Students, how many of you think society is best off with no pollution?” Every hand in the class is raised.
Okay, the instructor continues. You have commanded society’s resources to eliminate pollution. You have almost succeeded. There is no pollution left in the United States… except for one bubble gum wrapper floating through the breeze in the Colorado Rockies.
How many teachers do you take out of their classrooms to hunt down that one wrapper? How many nurses do you take out of hospitals in order to achieve your goal of zero pollution? How many cops do you take off the streets?
If you want to keep all the teachers teaching, nurses nursing and police policing, then you can’t believe that society is best off with no pollution. Therefore, society is best off with at least some pollution.
Economics 101, ladies and gentlemen.
This thought experiment blew my 18-year-old mind wide open. This way of thinking — which was completely new to me — was an intellectual awakening. I’ve been hooked ever since, and went on to become an economist myself.
It is easy to be cynical about economics, which can be imperial and condescending and irritating in its tendency to look for the lost keys under the streetlight. Economists largely missed the housing bubble, and many had pretenses of command over the macroeconomy that today look foolish. Academic papers are more and more about less and less, and many economists seem quite fine with that, thank you very much.
Even so, it has been disappointing to see economists and writers criticize the discipline of late. Particularly economics 101. For example, Paul Krugman — the co-author with Robin Wells of several introductory textbooks — writes that “even when Econ 101 is right, that doesn’t always mean that it’s important.” Economist Noah Smith goes even further, arguing in Bloomberg View that “most of what’s in” intro-level textbooks “is probably wrong,” and characterizing the models taught in economics 101 as working “once in a while.” The economics 101 curriculum, Smith writes, “focuses on telling pleasant but often useless fables.”
The attacks on 101 seem to be motivated in large part by public debate over whether demand curves slope down — e.g., by whether increasing the minimum wage will reduce employment, or whether increasing the supply of immigrant workers will reduce wages for native-born workers. The standard 101 supply-and-demand models of the labor market predict that both will occur.
Critics suggest that introductory textbooks should emphasize empirical studies over these models. There are many problems with this suggestion, not the least of which that economists’ empirical studies don’t agree on many important policy issues. For example, it is ridiculous to suggest that economists have reached consensus that raising the minimum wage won’t reduce employment. Some studies find non-trivial employment losses; others don’t. The debates often hinge on one’s preferred statistical methods. And deciding which methods you prefer is way beyond the scope of an introductory course.
Even more problematic, some of the empirical research most celebrated by critics of economics 101 contradicts itself about the basic structure of the labor market. The famous “Mariel boatlift paper” finds that a large increase in immigrant workers doesn’t lower the wages of native workers. The famous “New Jersey-Pennsylvania minimum wage paper” finds that an increase in the minimum wage doesn’t reduce employment. If labor supply increases and wages stay constant — the Mariel paper — then the labor demand curve must be flat. But if the minimum wage increases and employment stays constant — New Jersey-Pennsylvania — then the labor demand curve must be vertical. Reconciling these studies is, again, way beyond the scope of an intro course.
And even if all the empirical evidence was neat and tidy, the claim that the pages of economics 101 textbooks are filled with errors, trivia and “useless fables” is silly.
An economics 101 textbook is a treasure. The information therein captures the leaps forward in intellectual history, in our understanding of society — indeed, in our understanding of daily life.
Supply and demand is a model, sure. But the simple supply-and-demand model for labor market skills does a remarkably good job at predicting the evolution of wage inequality over the past several decades. It is deeply surprising that a few simple supply-and-demand graphs can summarize the aggregate consequence of millions of labor-market choices over decades of American history. But they can.
How do monopolies hurt society? When can the market veer off course, and how can the government help society by correcting the failures of markets? If you’ll die without water but not without diamonds, then why are diamonds so much more expensive than water? If firms want to be as profitable as possible, then why should they produce goods and services to the point that marginal revenue equals marginal cost, rather than simply generating as much sales as they can? Why is the cost of a college degree not simply tuition? How do individuals think about work-life balance?
Far from presenting “useless fables” that are mostly “probably wrong,” economics 101 presents powerful answers to these questions — and, perhaps more importantly, in so doing it teaches invaluable lessons about how to understand the world outside your door.
Look. Understanding society and the economy is tough business. Economics 101 textbooks have a large responsibility to do that right and well. Does the theory of comparative advantage presented in 101 tell you most of what you need to know to understand the Trans-Pacific Partnership trade agreement? Nope. But that’s a ridiculous standard to hold for an intro class. Are economics 101 textbooks perfect? Of course not, and they can and should be improved. But existing 101 textbooks are one of the best tools society has to prepare young people for responsible and informed citizenship.
Economists should be the last people to forget that.