Economics 101

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Also known as neoclassical economics and economism. Libertarians are fond of applying standard Economics 101 microeconomics principles to bash the state. They forget the many concealed ideological biases of Economics 101, they forget that the real world doesn't often match simple models, they forget market failures and they forget that microeconomics is not enough: you need macroeconomics too.

Links

Economism: Bad Economics and the Rise of Inequality (book) (2 links)
"This conviction that the world must behave the way it does on the blackboard is what I call economism. This style of thinking is influential because it is clear and logical, reducing complex issues to simple, pseudo-mathematical axioms. But it is not simply an innocent mistake made by inattentive undergraduates. Economism is Economics 101 transformed into an ideology—an ideology that is particularly persuasive because it poses as a neutral means of understanding the world."
101 Boosterism [More...]
"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."
101ism in action: minimum wage edition [More...]
Even professors and other professional economists make mistakes about Economics 101 situations and often ignore empirical evidence that contradicts 101 dogmas.
12 Alternative Principles [More...]
Thomas Sargent gave a speech with 12 supposed principles of economics. Here's an alternative set.
A Review of Boettke’s Living Economics [More...]
To the average economist or economics student, Boettke seems to be sending mixed signals from the outset. Are we supposed to be “living economics” or policing ourselves for any traces of Keynesianism—or “mainstream economics”, or “market failure”, etc.? ... a window into the way economics is done at George Mason University....
Assuming Slopes of Curves (1 link)
Standard neoclassical analysis assumes demand curves are necessarily downward-sloping and supply curves upwards-sloping. The real world doesn't necessarily agree.
Books used as sources during the writing of Economix [More...]
An excellent reading list for understanding how politics and economics interact. From the graphic-novel style Economix.
Deadweight Losses (7 links)
Libertarians love to complain about deadweight losses due to taxation, and frequently exaggerate their size visually by drawing large Harberger's triangles. But plenty of market activities also cause deadweight losses. And deadweight losses can be offset many times over by the actions government can take with tax money.
Economic Ideas You Should Forget (book) (1 link)
By discussing problematic theoretical assumptions and drawing on the latest empirical research, 71 authors question specific hypotheses and reject major economic ideas from the “Coase Theorem” to “Say’s Law” and “Bayesianism.”
Economics 101, Economism, and Our New Gilded Age
"This conviction that the world must behave the way it does on the blackboard is what I call economism. This style of thinking is influential because it is clear and logical, reducing complex issues to simple, pseudo-mathematical axioms. But it is not simply an innocent mistake made by inattentive undergraduates. Economism is Economics 101 transformed into an ideology—an ideology that is particularly persuasive because it poses as a neutral means of understanding the world."
Economics As Religion: From Samuelson to Chicago and Beyond (book)
An examination of the religious-style rhetoric upon which economics is founded and promoted. Themes of genesis, prophets, prophesies, salvation and more are illustrated.
Economics for the Rest of Us: Debunking the Science That Makes Life Dismal (book)
Shows how today’s dominant economic theories of economic efficiency and wages evolved, how they explicitly favor the rich over the poor, and why they’re not the only -- or best -- options.
Economics in One Lesson (book, online) (3 links)
(1946) Henry Hazlitt's Austrian-style anti-progressivism reactionary rant. Peddled as an introduction to economics, because anyone with some knowledge of economics would laugh at it. 65 year old "the world is coming to an end tomorrow" doomsaying.
Economics in Two Lessons [More...]
John Quiggans' draft response (in progress) to Henry Hazlitt's 'Economics in One Lesson'. The second lesson is: Market prices don’t reflect all the opportunity costs we face as a society.
Economism and Arbitration Clauses [More...]
"It’s unlikely that anyone actually believes that consumers understand arbitration clauses and take them into account when making buying choices. These arguments aren’t meant to be taken seriously. They are air cover for banking executives who like taking advantage of customers and politicians who want to do favors for the financial lobby. That’s the purpose of economism, and why it continues to be so influential." They are just parts of adhesion contracts.
Economists Dissing Economics [More...]
A list of 20 or so quotes, mostly from well known economists, criticising mainstream economics.
Economists used to be the priests of free markets -- now they’re just a bunch of engineers [More...]
Economics is being rescued from libertarianism. "[...] most economists favor government intervention in the economy in a wide range of areas, including income redistribution, minimum wage laws, environmental regulation, anti-discrimination laws, and others (and that was before the financial crisis!)"
Economix: How Our Economy Works (and Doesn't Work), in Words and Pictures (book) (3 links)
"Economix is a graphic novel by Michael Goodwin, illustrated by Dan E. Burr, that explains the economy. More than a cartoon version of a textbook, Economix gives the whole story of the economy, from the rise of capitalism to Occupy Wall Street."
Entrepreneurs (2 links)
The importance of private entrepreneurs has long been widely appreciated, which is why the patent system exists. Libertarians ignore the historic importance of public entrepreneurship, product of government investment in research and development.
Externalities (1 link)
Few actions can be undertaken in a society without affecting other people. These effects are called externalities, and they can be beneficial or costly. Econ 101 covers how to deal with externalities, but this is conveniently forgotten for the sake of libertarian argument.
Homo economicus (9 links)
The idea that humans are rational, economic maximizers. A common, simplifying assumption in most economic models, also known as economic rationality. It is also commonly agreed that this assumption is false. Behavioral studies with the Ultimatum Game are good evidence that it is false.
How to Refute the Core of Austrian/Neoclassical Economics in Four Easy Points [More...]
Maybe not so easy for laymen.  :-) Neoclassical economics is commonly known as Economics 101.
Ideological Mainstream Economics
The economics taught in introductory courses generally has a large number of concealed ideological biases. These biases coincide with many libertarian biases. Economics is not logical, dispassionate, value free or utilitarian: all these terms attempt to conceal assumed values. Economists cannot escape David Hume's dictum: “Reason Is and Ought Only to Be the Slave of the Passions.”
Individual Choice (1 link)
Individual choice is a misleading concept: individuals do not control the choices available and are heavily influenced by advertising, propaganda, and other irrational factors. It also focuses attention away from alternatives, such as social choice.
It Matters How Rich the Rich Are [More...]
"[...] the poor can be made not-poor by reducing the wealth/income of the rich in order to increase the wealth/income of the poor. In that sense, then, the richness of the rich is a cause of the poorness of the poor."
Living in a Second-Best World [More...]
An introduction to why deregulation and competition may not create their intended benefits, due to the Theory Of The Second Best.
Mark-up Prices (2 links)
The widespread real-world use of mark-up prices, also known as administered prices, contradict the assumptions of marginalist theory of prices and many DSGE models based on marginal costs.
Market Failure (26 links)
Real world economies are rife with market failure. This means choosing between second-best options such as imperfect markets, NGO's and government solutions. Ideology and economic theory cannot say which is best: you must resort to experimentation and history.
Market Power (11 links)
In a market exchange, there is producer surplus and consumer surplus. Market power is a market failure that occurs when producers can raise prices above the marginal costs to capture more of the surplus. Usually through monopoly, oligopoly or other bottleneck techniques. Libertarians often deny the existence of market power.
Markets Today Are Radically Different Than What We Believe -- We Have the Façade of Competition [More...]
"Will the collection of consumer data by digital platforms ultimately expand choice and empower consumers, or will it be used to diminish consumer surplus?"
Minimum Wage (15 links)
Contrary to Economics 101 dogmas, minimum wage law has no harmful effects on employment according to many real-world studies. And definitely not the harmful effects long claimed by its opponents. Minimum wage does effectively reduce poverty.
Mixed Economy (14 links)
Existing markets are important parts of our mixed economies. The most socialist or communist economies in the world still use mixed markets, though they are more weighted towards central direction. Likewise the most capitalist economies, are still weighted towards central direction within corporations.
No One Makes You Shop At Wall Mart: The Surprising Deceptions Of Individual Choice (book) (1 link)
Tom Slee's easy to read game-theoretic description of how MarketThink, the dogma of individual choice, does not lead to optimal outcomes.
Pareto Optimality (6 links)
Pareto optimality is often an illusory hope. Markets can theoretically produce Pareto-optimal results, but there are plenty of reasons why they might not. Nor do markets help us choose which Pareto Optimum we'd want of many possible optima. Pareto improvements assume many things which are not true, such as that inequality doesn't matter. They also are frequently used in bait-and-switch: lump-sum transfers to make sure everybody benefits are often conveniently forgotten. And there are other solutions (including centralized solutions) which can also produce Pareto-optimal results
People Actually Use Food Stamps to Buy More Food [More...]
This defies the standard rational economic model's "fungibility of targeted benefits", which treats all income as shiftable to other purposes. "Putting all your income into a single pile, and then spending out of that pile, is the rational thing to do. But it turns out that most human beings aren’t rational -- at least, not in this regard."
Private Sector Waste (5 links)
It is widely assumed that government is wasteful but the private sector is not. Every kind of market failure presents opportunities for private sector waste. Everybody who has worked in the private sector can tell stories of waste in their business. Competition may not be strong enough to eliminate very much waste.
Rational Fools: A Critique of the Behavioral Foundations of Economic Theory [More...]
Nobel prize winner Amartya Sen rejects the simple egoism of economic man, as well as universal moral systems, and points out that "Groups intermediate between oneself and all, such as class and community, provide the focus of many actions involving commitment."
Ronald Coase And The Misuse Of Economics [More...]
How the Coase Theorem was misused by right-wingers to do the bidding of big business.
Teaching Economics? Start with Key Contested Ideas [More...]
Many basic ideas in economics are highly contested: how decisions are made, value, what economics is, capital, money, how to measure the economy, different economic systems, institutions; policy and economists’ relationship with it.
The contradiction in economics [More...]
Thomas Sargent's 12 lessons of economics have been criticized as "as either too simplistic, partial or just wrong". But are these really lessons or just assumptions economists make?
The mainstream economics curriculum needs an overhaul [More...]
Undergraduate economics education is not properly training tomorrow’s policymakers. At the minimum they need some economic history, the diversity of economic viewpoints and training in skepticism of all economic claims.
Value-free economics? [More...]
Vivian Walsh and Hilary Putnam's The End of Value-Free Economics points out that the attempt to draw a sharp line between "fact" and "value" turns out to be impossible. Including in economics. That means bringing in orienting human values at the foundations.
What Do Econ 101 Students Need To Remember Second Most From The Course? [More...]
Brad DeLong lists 7 assumptions necessary to "market efficiency", and describes the frequent failures of these assumptions. "A great government will have foresight and take care to structure political-economic institutions to make these seven arenas of myopia and market failure as small as possible."
What Every Economics Student Needs to Know and Doesn't Get in the Usual Principles Text (book)
John Komlos shows how misleading it can be to mechanically apply the perfect competition model in an oligopolistic environment where only an insignificant share of economic activity takes place in perfectly competitive conditions.
What is Wrong with Neoclassical Economics? [More...]
"The list is a long one and includes practically every major theory [...]" At least 16 important assumptions that are often false.
What’s the Dead Weight Loss of a Consumption Tax When Externalities Are Present? [More...]
When negative externalities exist, the marginal social benefit and marginal private benefit (i.e., demand) curves do not overlap because the externality produces a social cost. A tax can fully internalize the externality at zero deadweight loss.
When econ models potentially mislead, econ profs should say so [More...]
Models are often based on assumptions that do not hold in the real world. When they are used to support real-world policies, these failings of the models should be highlighted.
Where Private Investment Fails [More...]
Institutional economics. "[...] under rather common circumstances it is efficient (maximizing of profits, minimizing of long run average costs) for explicit rules, regulations, commands, organization charts, and social contracts to replace the invisible hand.
Why the 101 model doesn't work for labor markets [More...]
The Econ 101 supply-and-demand model is just not a good description for the labor market. Supply-and-demand graphs are for one single commodity; labor is highly heterogeneous.
Yes, Nick Kristof, There Is a Conservative Bias in Economics [More...]
"The conservative bias in economics begins with the baseline theoretical model, what is often called “Economics 101.” This model of perfect competition describes a world that agrees with Republican ideology."

Quotations

There are substantial parts of ordinary human activity that don't make sense if we think of rationality as egoistic maximization of utility. Collective action, group mobilization, religious sacrifice, telling the truth, and working to the fullest extent of one's capabilities are all examples of activity where narrow egoistic rationality would dictate different choices than those ordinary individuals are observed to make. And yet ordinary individuals are not irrational when they behave this way. Rather, they are reflective and deliberative, and they have reasons for their actions. So the theory of rationality needs to have a way of representing this non-egoistic reasonableness.
Daniel Little, "Amartya Sen's commitments"
If there were any methodological justice in the world, neo-classical economics should have been relegated to the scrap-yard of theories long ago. True, the Arrow-Debreu model is, as Stephen Maturin would say, the elegant mathematical theory of the world, but as a description of how economies work it is incredible in the worst sense. The most telling criticisms, all valid, fall into three clusters. The first, and to my mind the most compelling, has been urged with great force by Herbert Simon (among others): people simply are not perfectly rational, perfectly prescient utility maximizers, and they couldn't be even if they wanted to. Second, the kind of economy assumed by neo-classical theory is a very special and recent phenomenon, originating in particular countries in particular epochs, and while it has since spread from there and seems likely to conquer the globe, the neo-classical theory is restricted to the places where economic life is conducted in markets with unrestricted, alienable private property, so it is not a general theory of economic behavior, something deeply desirable. Third, even in the countries with the appropriate legal-institutional framework, perfect competition is exceedingly rare, very important parts of the economy are manifestly oligopolies, and certain kinds of competition are even legally prohibited by e.g. intellectual property laws.
Cosma Shalizi, "Homo economicus on the Grand Tour, or, When Is a Lizard a Good Enough Dragon for Government Work?"
The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.
Joan Robinson, in Marx, Marshall And Keynes
The invisible hand of the market makes a very good pickpocket.
Mike Huben
MarketThink is guaranteed to erode public space and public goods in the city.
Tom Slee, "No One Makes You Shop At Wall Mart: The Surprising Deceptions Of Individual Choice" pg. 63.
Competition and variety are also public goods: by their nature, neither can be provided by a single store. Jack never explicitly chooses to have a narrower choice of places to shop, and yet he and others like him contribute directly to the problems of the downtown stores. [That are failing due to big-box stores.]
Tom Slee, "No One Makes You Shop At Wall Mart: The Surprising Deceptions Of Individual Choice" pg. 59
So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case. [...] But here’s the thing: economists have done their work this way for generations. So it’s really not a new paradigm. If anything, the true new paradigm was the attempt to justify everything with maximization and equilibrium -- but that’s the paradigm that failed.
Paul Krugman, "Paradigming Is Hard"
The basic competitive-markets model dating back to Adam Smith has been modified over time by the inclusion, in rough historical order, of monopoly, externalities, scale economies, incomplete and asymmetric information, irrational behavior, and many other real world features.
Dani Rodrik, "Rescuing Economics from Neoliberalism"
Neoliberalism and its customary remedies -- always more markets, always less government -- are in fact a perversion of mainstream economics. Good economists know that the correct answer to any question in economics is: it depends.
Dani Rodrik, "Rescuing Economics from Neoliberalism"
A journalist calls an economics professor for his view on whether free trade is a good idea. The professor responds enthusiastically in the affirmative. The journalist then goes undercover as a student in the professor's advanced graduate seminar on international trade. He poses the same question: Is free trade good? This time the professor is stymied. "What do you mean by 'good?'" he responds. "And good for whom?" The professor then launches into an extensive exegesis that will ultimately culminate in a heavily hedged statement: "So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone's well being." If he is in an expansive mood, the professor might add that the effect of free trade on an economy's long-term growth rate is not clear either and would depend on an altogether different set of requirements.
Dani Rodrik, "Rescuing Economics from Neoliberalism"
It is really quite rare to find a buyer’s market for rented accommodation. Even if there is a slight oversupply of rental units for sale, time is almost always on the landlord’s side, because waiting is typically much more inconvenient for the party that has to wait without a house to do wait in. In general, when tenants and landlords are negotiating over the potential Pareto gain that could be made from renting the house, the landlord ends up capturing most or all of the surplus. The hot water and habitability laws are simply aimed at skewing things a bit in favour of the tenant and putting a floor on how bad a deal the tenant can end up accepting. It’s a standard game theory result that something which reduces your options can benefit you by reducing the number of bad options that you can end up agreeing to (most famously, the secret ballot has to be compulsory, because if you had the option to reveal your vote, you could be intimidated), and habitability laws are there for exactly this purpose.
Daniel Davies, "The correct way to argue with Milton Friedman"
Williamson borrowed from Coase the concept of "transactions costs" the idea that the market price in any transaction may fail to incorporate the full costs to the seller or buyer because of the very conditions of exchange. In particular, whenever there is uncertainty or the need for long-term relationships, the parties to a transaction are unlikely to be able to write contracts complete enough to cover all the contingencies or hidden costs. Furthermore, incomplete contracts encourage one or the other party to behave opportunistically, deliberately withholding information or broadcasting disinformation to get a better deal. In such cases, the transaction is likely to occur under a single roof, inside a "hierarchy" (that is, firm). This solution "internalizes" or reveals to the decision makers those otherwise hidden costs. Williamson showed that there are, even in pure theory, situations in which the inefficiencies of bureaucratic organization are offset by the greater predictability of the outcome. This is showing quite a lot, at least to academic economists. It says that under rather common circumstances it is efficient (maximizing of profits, minimizing of long run average costs) for explicit rules, regulations, commands, organization charts, and social contracts to replace the invisible hand.
Bennett Harrison, "Where Private Investment Fails"