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What’s Wrong with Economics?

By James H. Nolt

My son, who is a high school senior, is currently taking Advanced Placement (AP) economics. His textbook reminds me of all that is wrong with how economics is taught in schools.

Though the famous economist Paul Krugman is listed as the main author of the text my son’s class uses, I have to give him the benefit of the doubt and assume he was not responsible for most of the content, because it is far more conservative than Krugman’s reputation. Regardless of its ideological bias, it is so unhistorical (i.e., unempirical) and logically flawed that I am provoked to blog about this problem in this column and several to follow.

Krugman’s text is quite similar to every other introductory economics text today for the simple reason that the content is largely dictated now by the College Board, the private organization that produces the AP tests, plus SAT, GRE, GMAT, and other standardized tests. The often unspoken cost of establishing standards through testing is that whoever writes the test determines the content of education worldwide, since a small oligopoly of textbook publishers supplies most of the world market.

It’s not the free market the textbooks crow about. Textbooks are so expensive, and yet so uniform, dull, and wrong-headed. Even many of their authors, like Krugman, probably know better, but they will not tell you the interesting things they may know because all real critical content is squeezed out by the standard template. In America and most of the Western world, critical education is the rage rhetorically, but you would never know it by looking at any of the standard textbooks in economics, business, or political science, three subjects I know well and teach.

For economics, the standard template was established by Paul Samuelson in 1948 with the first edition of a text with simple title Economics that went through more than a dozen editions. I took my first economics class using the ninth edition, published in 1973, but I also own the second. Since then, if anything, textbooks have gotten worse. There are no new ideas in them, except for a few very minor sidebars, but many of the qualifications and caveats that made Samuelson’s text more nuanced are gone.

Core elements established by Samuelson are still present today, including almost a complete lack of data, especially in microeconomics. Nearly all the examples are fake, because conditions that textbooks describe, like perfect markets and U-shaped cost curves, do not exist. If students were exposed to real data, they would quickly see how wrong economics is. Along with a lack of data is an almost total disregard of economic and business history, not to mention history of thought in economics and political economy. Do not expect to find these things in the higher level curriculum either. When I majored in economics, it was still required to take one course each in economic history and the history of economic thought, but these have been eliminated from the curriculum in most universities. Remembering the past would expose the skeletons in the economic closet today.

What also endures since Samuelson is a heavy layer of propaganda in favor of the mythical “free market.” Samuelson’s text was a major weapon in the Cold War against the Soviet Union and Marxism. It is still obligatory in every economics text to trash Soviet-style planned economies with the sim-plistic error of comparing the efficiency of an idealized free market with the corrupt exercise of power in a Soviet-style system. Even though the Cold War is long over and central planning predominates today only in North Korea and Cuba, this Cold War legacy still features in the textbook template and the AP test. The texts avoid comparing real oligopoly capitalism with historical socialism, because that comparison, though it still might favor capitalism, would draw attention to actual flawed economies, rather than the idealized free market. It might even result in an outbreak of critical thinking. Banish the thought!

Another carry over from Samuelson is the hypocritical distinction made near the beginning of every text between so-called positive and normative economics. Positive economics is allegedly scientific, since it only describes the world as it is, using models tested with data, whereas normative economics includes arguments about the way the world should be. This is okay too, textbooks argue, but they emphasize that what they contain is primarily positive economics so that the reader’s normative opinions can be rooted in accurate analysis. If only this were true.

Reader beware. Few of the core ideas of economics are regularly tested. If they were, they would easily be shown to be false. Economists mostly know this, so all those ideas that would test false are safeguarded by changing them from testable propositions into assumptions of the model. The reader is lectured that even if these assumptions are unrealistic, some unreal assumptions must be made in every scientific theory to make progress.

Assumptions known to be false are also made in physics, for example, in mechanics, for simplicity, it is sometimes assumed that the mass of an object exists at a single point, its center of gravity. Likewise, the law of gravitational acceleration is stated as it would operate in a vacuum. These sorts of heuristic assumptions may be necessary and legitimate at a point in an argument. Economics texts say economic methods are no different.

Actually economics operates in a way far different from physics or any other legitimate science. When real physicists and other scientists are introduced to the ways of economics, they often scoff. For example, physicists and practitioners, such as engineers, know the difference between a heuristic assumption made for the convenience of elaborating a theory or law and an actual empirical study. Thus, although basic understanding of the law of gravity is based on behavior in a vacuum, no engi-neer would ever design an airplane as if it should operate in a vacuum. Instead, all practical studies bring into consideration every significant force bearing on an aircraft in flight, not just gravity. Nor do they assume that the aircraft is a single mass concentrated at a point. Instead they consider forces, such as torque and sheer, that may bear on extended bodies. Empirical work that is truly scientific must be based on accurate assumptions.

Economists, on the other hand, entertain core assumptions known to be radically false throughout their empirical studies. These assumptions are made partly for mathematical convenience but mostly for ideological consistency. That is, they make the assumptions necessary to prove the results they are seeking, regardless of how unrealistic those assumptions are. Thus in fact, all textbook economics is normative. It is almost devoid of positive, factual information, let alone correct theories about how the economy works.

Since my first article that introduced this blog, I have been illustrating how political economy can be done and should be done. The major obstacle to doing it right is that economics as now constituted pretends to impart knowledge about how the economy works, but it has largely abrogated that promise in favor of propaganda embodying the myth of the market, and little more. I will continue this thread next week by examining what is the unshakable ideological core of textbook economics.



James H. Nolt is a senior fellow at the World Policy Institute and an adjunct associate professor at New York University.

[Photo by Simon Cunningham]


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