View source for 101 Boosterism

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[[Category:Paul Krugman]]
[[Category:Economics 101]]
[[Category:Global Warming]]
[[Category:Globalization, Free Trade and Economic Freedom]]
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{{DES | des = "The point is that just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance, here or elsewhere. People should know what’s in the textbook; above all, they should buy my book! But never imagine that it’s the be-all and end-all of what matters." | show=}}
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I see that @drvox is writing a big piece on carbon pricing – and agonizing over length and time. I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about for a while, a phenomenon I’ll call “101 boosterism.”

The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.

My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.

The example I think of most is in my original home field of international trade. Comparative advantage says that countries are made richer by international trade, even if one trading partner is more productive than the other across the board, and the less productive country can only export thanks to low wages. Paul Samuelson once declared this the prime example of an economic insight that is true without being obvious – and to this day you get furious attempts to refute the concept. So comparative advantage has, for generations, been considered one of the crown jewels of economic analysis.

Now, there are a variety of reasons why, despite this big insight, free trade may not be the right policy – that’s Noah’s 101ism. But I want to make a different point: even if comparative advantage is a profound insight, does this make free trade versus protectionism a front-burner issue? How important is this insight, anyway?

And the answer – the answer that comes from standard trade models – is, not as important as many people seem to think. Yes, protectionism reduces world income. But if you want to make the case that trade liberalization has been the principal driver of growth, or anything along those lines, well, the models don’t say that. If you want enormous benefits to trade, you have to invoke things like technology transfer that aren’t in the very analysis that gives the case for free trade such prestige.

In fact, you see a lot of that. There’s a kind of bait and switch, in which people invoke Ricardo and the gains from trade to say “free trade good”, then tell scare stories about how protectionism would destroy millions of jobs and cause a global depression, which doesn’t make much sense – and in any case has nothing to do with the classical analysis of the gains from trade.

It seems to me that there’s something similar involved in discussions of carbon pricing.

Econ 101 tells us that if you want to reduce emissions of a pollutant, the most efficient way to do that is to put a price on emissions, so that all possible routes to reduction are taken, and the marginal cost is the same for all routes. It’s a real insight, and has had positive impacts on real-world policy — cap-and-trade has worked very well at reducing acid rain.

That said, there are reasons Econ 101 may not be right here. There is some evidence that consumers aren’t hyper rational when it comes to conservation, that they may pass up conservation opportunities even when it would save them money — and in that case rule rather than prices may be the right way to make them change. And to the extent that we’re talking about innovation, the Econ 101 case says nothing at all: the efficiency case for carbon pricing is about making best use of existing technology, not about providing incentives to develop better technology.

But leave all that aside, and ask: how *important* is it that our carbon-emissions strategy take the form of a universal or near-universal price on carbon?

The answer, in principle, is that it depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.

And what I gather from reading various analyses of our prospects is that we’re closer to case #2 than to case #1: the problem of limiting climate change isn’t all that complex. End coal-burning and you’ve gone a significant way; a few other big things get you another substantial part of the way. Yes, comprehensive carbon pricing would be best, but it’s not the sine qua non of effective action.

The point is that just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance, here or elsewhere. People should know what’s in the textbook; above all, they should buy my book! But never imagine that it’s the be-all and end-all of what matters.
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