Yes, Students Still Need Econ 101

In an article published recently in the Atlantic, “The Curse of Econ 101,” University of Connecticut law professor James Kwak argues against what he assumes to be the content, thrust, and effect of the basic principles course, Economics 101.

He thinks it’s too simplistic. And he’s sure that in its simplicity, it masks the complexities that must be accounted for when passing judgment on economic reality and especially on government policies.

According to Kwak, over the past few decades Econ 101 has devolved into “economism,” which he describes as “the belief that basic economics lessons can explain all social phenomena—that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an Economics 101 textbook.” The two-dimensional illustrations to which Kwak refers are supply-and-demand graphs.

In Kwak’s telling, Econ 101 professors indoctrinate impressionable students with the belief that anything in reality that is economically essential can be explained with simple and abstract supply-and-demand analysis.

Moreover, according to Kwak, this abstract emphasis on supply and demand is both a consequence and cause of a larger problem with economics in general. That problem, Kwak notes, is that “economics degrees are highly mathematical, adopt a single narrow perspective and put little emphasis on historical context, critical thinking or real-world applications.”

That observation about economics degrees is Kwak’s one kernel of truth. Modern economics is indeed excessively mathematical and typically presented without historical context, critical thinking, and real-world applications.

Too many students are instructed that economics is the science of revealing the pure, eternal, and elegant mathematical description of the pattern of prices and quantities that is called “general competitive equilibrium”—an equilibrium that automatically emerges from the reactions of sheep-like utility-maximizing consumers and of machine-like profit-maximizing producers.

There is, in these theories, no room for ideas, discovery, creativity, entrepreneurship, genuine change, error, or real competition. (One of the great ironies of modern economics is that in general competitive equilibrium there are no activities that any human being would recognize as competitive.)

This economic fantasy world is bloodless and sterile. It’s a world so foreign to human society that it is largely useless in helping us to make sense of reality. Kwak is right to lament that principles of economics students are often taught that way.

I’ll add that of the students who are not taught economics in that ethereal way, too many of them are taught that economics is the “science” of collecting and processing as much data as possible, torturing those data with ever-more-esoteric econometric devices, and reporting the empirical results largely independently of any underlying theory of economics. But we here ignore that problem with economics because Kwak’s complaints are limited to what he alleges to be the misuse of economic theory.

So I join Kwak in objecting to such airy theorizing. But I dissent from his identification of supply-and-demand analysis as the quintessence of such airy theorizing.

When taught well and wisely, supply-and-demand analysis is the central part of the economic way of thinking. This way of thinking both deepens and broadens students’ understanding of economic reality. Contrary to Kwak’s assertion, such analysis teaches neither that prices automatically and without friction move to equilibrium levels nor that nothing matters except consumers’ and producers’ narrow material concerns.

Instead, the economic way of thinking incites students to ask probing questions about reality that they would otherwise never ask. It encourages them to search for and discover aspects of reality that would otherwise remain hidden. It prompts students to ponder the reality far more profoundly and fully than they would otherwise do. Junking or radically changing Econ 101 would leave students ill-prepared to understand the world around them.

I will illustrate with an example used by Kwak himself: minimum wage laws.

Most people with no exposure to economics believe minimum wages to be an effective means of raising the incomes of low-skilled workers. The reasoning is simple: if government mandates that employers pay higher wages, workers will therefore receive more. But the economic way of thinking reveals this reasoning to be too simple.

Most obviously, the economic way of thinking makes students aware that, as the cost of taking some action rises, people take less of that action. (It’s called the “law of demand.”) So if employers must pay their low-skilled workers higher wages, the quantity of low-skilled labor that will be employed will fall. Quite likely, some low-skilled workers will lose their jobs. Many others won’t be able to find any legal work. Some intended beneficiaries therefore become unintended victims.

This lesson is indeed, as Kwak notes, commonly taught in Econ 101 classes. But Kwak objects that this lesson is too simplistic. Other things happen, says Kwak, to render this conclusion that some people will be harmed false.

Well, yes, other things do happen. But the other things that happen are things that reinforce the standard conclusion about the minimum wage, while the things that Kwak asserts do happen are things that the economic way of thinking reveals probably do not happen.

For example, Kwak says that workers become so much more productive when their wages rise that this higher productivity pays for the wage hikes.

This relationship between wages and productivity undoubtedly holds in many instances. But a good Econ 101 student asks (and answers) two questions. (1) Does this relationship always hold? (No, for if it did every worker’s pay would be multiple times Bill Gates’s annual income.) (2) When this relationship does hold, do firms have to be forced by government to raise workers’ wages? (No, for it is in each firm’s own private interest to raise its workers’ wages whenever doing so results in productivity gains at least as large as the wage hikes.)

Or consider Kwak’s howler that minimum wages have no negative employment effects because employers just pass along the cost of minimum wages to consumers in the form of higher output prices.

The good Econ 101 student would point out, in response to this claim, the fact that higher prices for consumer goods and services cause consumers to buy fewer such goods and services, thus reducing employers’ demand for workers to produce these outputs. And if Kwak retorts with “How do you know? That’s too simplistic!”, the student calmly reminds him of the inescapable reality of trade-offs: if consumers buy the same amount of, say, McDonald’s burgers as before but at higher prices, the extra spending must be offset by decreased spending somewhere—say, at Walmart—which results in lowered production and employment elsewhere.

It turns out that the analyst who is simple-minded is not the good Econ 101 student, but instead, Kwak himself, who clearly doesn’t have what it takes to reason as carefully as does this student.

Fortunately, despite the excessive formality of advanced economics, good Econ 101 courses are not uncommon. In those courses, students learn the “mental toolkit” of economists.

They learn that prices and wages are not set arbitrarily, that voluntary trade that crosses political borders is no less mutually advantageous than is voluntary trade that doesn’t, that all goods and services have costs that someone must pay, that profits are a reward for serving consumers and not an unjust extraction from workers, that intentions are not results, and much more.

Along the way, they also learn that most of what non-economists, and their political representatives, believe about the economy is mistaken.

And students discover that there are reasons to doubt that coercive government policies like the minimum wage can on balance improve our welfare. That seems to be Kwak’s main complaint against Econ 101. It’s a badly misguided one.

  • Dwight Lee

    Boudreaux is correct about the ability of simple supply and demand curves to provide insights that seem to escape “deep” thinkers who see dismiss those curves and simplistic. The problem of teaching a beginning economic course as a highly technical exercise is an extremely serious problem. The introductory course is the only chance most students have to get an understanding of the benefits we all receive from the amazing economic cooperation made possible only by the markets. And few students gain that understanding from a the highly technical presentation they get from many introductory courses. But these student do get clear presentations about market economics in many social sciences and humanity courses that are taught by teachers who have less than an introductory level of economics themselves. What many of them do have is a naïve view that markets are based on exploitation and injustices that can be corrected by government.

    • George Leef

      Thanks for sharing your thoughts, Dwight. I’d add that not only do many professors have a naive view about markets, but most also have a naive view about the efficacy of government intervention to supposedly correct the “market failures” they believe lurk almost everywhere.

      • Dr__P

        Market failures exist, but are largely self-correcting over time.

        Yet government intervention requires ANOTHER government intervention to correct. Worse the second intervention often is wrong and compounds the issue.

        • Glen_S_McGhee_FHEAP

          Has no one here lost money in the 2007-2008 financial collapse?

          As Elizabeth Renuart and Kathleen Keest 2012 report in their transcript on the integrity and accountability of secondary mortgage markets, “We’re talking about ethics and standards here, but the overarching thing that I think we saw for the last — well, actually, it’s been a gradual process for the last 30 years — but was really heightened in the last decade — was an effort to eliminate friction from the market. We’re in Minnesota. We KNOW that friction actually has a function. For those of you who ever tried to drive on bare ice, friction serves a purpose. But for a great deal of the last few years, the mantra has been to try and get rid of friction in the market. The policy was to put a primary emphasis on trying to get rid of everything that we thought was a speed bump [to a well-oiled market], irrespective of what value that speed bump brought.”

      • DrOfnothing

        Yet another inaccurate generalisation based solely on ideology and groundless speculation. Please offer some evidence with these little tid-bits. Otherwise, it’s just another skewed PSD (Public Service Disinformation). “Hey, great article, but don’t forget, here in Mr. Roger’s neighborhood, all Professors are Liberal and stupid!”

    • Kenneth

      This really reminds me of a video about introducing science concepts in an engaging manner, rather than getting bogged down in terminology and specifics. Younger students, but similar concept.

  • Jerryskids

    My primary complaint with economics as it is taught is that it fails to make the real-world connection to the idea that all things are economic, it’s not “the economy” simply in terms of jobs and wages and production. It’s all about trade-offs in attempting to maximize happiness, however happiness is defined by the individual.

    A simple example, you ask your buddy if he watched the game last night and he replies that he wanted to, but he had to take the wife out to dinner instead. What the guy wanted was to stay home and watch the game and still have a happy wife but that was not an option. He could stay home to watch the game and have an unhappy wife or he could miss the game and make his wife happy. He chose a happy wife over watching the game because that was the option actually available to him that would maximize his happiness. That’s economics – everybody’s got a certain basket of options available and they’re all doing the best they can with what they’ve got.

    • First ever lesson of economics (at school, mind): what is the economic problem?

      We all thought it was the GFC. Nah, it was scarcity. Which is to say, on what evidence do you base your characterisation of how economics is taught?

      • Jerryskids

        My Econ 101 class in college started out with graphs. My real economics education started in about the fourth grade with a kid that sold candy on the playground – ask him why he charged so much and he’d tell you you were free to go buy it somewhere else if you wanted.

        • Cool story, bro: needs more relevance… I find it useful, when asked, to answer questions but maybe I’m a bit weird.

          And if it started with graphs, it’;s time to email your lecturers and suggest to them there is something they ought to do first. Indeed, 101 for myself basically began with our lecturer taking pot shots at the course book’s “it’s a way of thinking” and “useful for democracy” lines. Which, you know, is delightfully jaded but not really appreciated by first week first years.

          But, even so, it should be possible to introduce the notion of scarcity… even if it is not the literal first thing. Which brings us back to the question asked and so obliquely ignored: from what do you proclaim the mis-teaching of economics typical?

          • Jerryskids

            My sister has a good chocolate cake recipe. I remember this one time, we went to her house and she wasn’t there but we stole half the cake she had on the counter and smeared chocolate frosting on the dog’s paws so it would look like the dog got into it. It was an albino terrier mutt of some sort, a weird dog. It always ran after cars on the street but one day it got run over by an old lady driving an Oldsmobile. I used to have an old car, but it wasn’t an Oldsmobile, just an old car. I got it real cheap because it stunk real bad, like a troll had died in the trunk or something. You ever smelled a troll? They stink, you should avoid them.

          • Did you… just call yourself a troll?

            Or, was this some oblique critique of anecdotes? (Rhyming is cool, m’kay?)

            Not sure if trying… pun intended.

  • Mark Burk

    Probably the biggest challenge in teaching any subject is getting the students (from the 1st lecture) to be interested in its subject matter. As obvious as it may seem, in the case of Economics the subject matter is Human Behavior- what people do (how they behave) regarding the fact that although our wants, until we die, are infinite, resources are limited and as a result, we must compete for those resources. Even someone who consumes nothing more than the absolute bare minimum in order to get by will have to choose whether or not to do just that in order to continue living. I mention this because not only is it true (that Economics is about Human Behavior) but in addition, and from a more practical point of view, it occurs to me that many college students are very interested in “people-focused” courses: Psychology, Sociology, etc. If that’s the case then they should be as interested, if not even MORE interested in Economics. Economics is NOT about supply-demand curves, money, marginal analysis, etc. Those things are tools that we use to analyze the human behavior we observe.

  • Let’s start again… a minimum wage is a price floor. Say it with me: price floor. What does everyone from 101 know about price floors? That they are only influential if they’re above the equilibrium price?

    And what does everyone who thinks about 101 learn about markets? That the default state is market failure because lecturers look at the stringent assumptions and generally goad their students into having a good laugh before noting the value of knowing what the idea outcome is.

    What does this mean, in practice? That if you were honest, you’d have to say the thinking student of 101 concludes that, odds are, all raising a minimum wage would do is simply result in more derived demand for labour due to an increase in expenditure. Because, you know, we have in (2) a reason to suspect the market is not in equilibrium and in (1) a consequence of a kind of non-equilibrium market price (i.e. wage) and in (0) we assumed “thinking student” so we’ll assume they infer that firms generally have the power in employment dynamics (esp. with minimum wage roles) based on being alive.

    But what is more is that they’re a thinking student… so they’ll think that maybe in some places the minimum wage is pretty much at equilibrium… which would explain the contradictory empirical studies (absent from this hackjob).

    Also, I have to give you a D… a change in price does not affect demand. It affects the /quantity/ demanded. Think of price as what we’re evaluating the function at… to change demand, well I don’t know what would be going on but we’re probably not even concerned with functions in 101 anyway so who cares?