Economic education today is, for the most part, worse than no economic education at all says economics lecturer Per Bylund. He explains himself in this guest post ...
Economic Education Has Become Economic Disinformation
by Per Bylund
Modern economics is in terrible shape. But economics education appears to be worse still. This becomes clear when discussing basic economics with those who have taken courses in the field. Rather than doing away with economic misunderstandings and outright nonsense, economics education apparently provides students with a pseudoscientific rationale for their illusions.
Two such ideas are annoyingly common. One is the view that markets can only work under perfect conditions. The other is that economic growth requires that profits tend toward zero. Yes, they are ridiculous, but they are so commonly held (and believed so strongly) that they suggest a fundamental failure of economics education. Whether or not they are explicitly taught, it is easy to see how an economics education that focuses on models rather than understanding can lead to—if not create—such misperceptions.
Introductory economics courses often take the perfectly-competitive model as a starting point so as to introduce students to economic thinking. It makes sense to do it this way. By assuming away complexities, students can be introduced to the economic way of thinking, ceteris paribus reasoning, and supply-and-demand analysis.
The approach is innocent but can be counterproductive or even destructive unless students also learn that a model is merely a simplified version of (and thus different from) reality. The model is not reality, and its assumptions are not real, but because of its simplified assumptions it facilitates analysis of reality. A model is a tool.
This obvious fact seems to not be communicated to economics students, who instead adopt the model wholesale as not only a description of but a necessary condition for reality. In other words, because the supply-and-demand diagram used on the blackboard relies on “perfect information,” many students conclude that real markets only work under such conditions.
It is of course the other way around: markets work because they solve or alleviate the problems that are excluded from the model. As Friedrich Hayek pointed out, there is no competition in the perfectly competitive model. All such activities are assumed to have already taken place so that the allocation under end-state efficiency can be explained—and the economic trend in markets therefore uncovered. But students somehow learn the exact opposite.
This idea is similarly a misapplication and misunderstanding of a model presented to students. In the static model of the economy, under assumptions of perfect information and zero transaction costs, economic profits will be zero. This is mainstream economists’ rather quirky explanation of economic efficiency: because all opportunities have already been taken advantage of, value production is maximized.
As follows from this model logically, profits tend toward zero as market reality closes in on “perfect” competition assumptions (that is, the problems are solved or alleviated). There is empirical support for this too: profits tend to fall in commodity markets and mature industries that are no longer innovative (the low-hanging fruits have been picked). Producers compete on cost rather than value. But this does not mean the economy is in an end-state; it only means some industries (such as grain production) have come to the end of the road in terms of product development—entrepreneurs see little or no opportunities for new value creation.
In reality, economic growth — more accurately economic progress — is the process of closing in on this highly theoretical end-state (which we as economists of the Austrian school realise is only theoretical—it cannot and never will be achieved). Our higher standard of living (economic growth) is the result of innovations that create more value—it is not the result of an absence of innovations.
That students struggle with understanding the use and value of models, and may draw the wrong conclusions when studying market forces in the abstract, is unfortunate but understandable. It is the duty of the economics instructor to make sure students do not get the wrong ideas—that they go home with a greater understanding of how economies and markets work. Education, after all, should be enlightening and provide the student with new knowledge.
But somehow economics education fails to communicate the obvious fact that markets solve problems, not that they require that all problems have already been solved. And that economic growth is the creation of new value, not the absence of creating such value.
The failure of economics education is not merely the unproductive use of instructors’ and students’ time. As the above examples show, it is in fact destructive—students of economics get the wrong ideas and therefore graduate with less (not more) understanding of how markets and economies work.
Economics education with this outcome is disinformation, and we are better off without it.
Modern economics is in terrible shape. But economics education appears to be worse still. This becomes clear when discussing basic economics with those who have taken courses in the field. Rather than doing away with economic misunderstandings and outright nonsense, economics education apparently provides students with a pseudoscientific rationale for their illusions.
Two such ideas are annoyingly common. One is the view that markets can only work under perfect conditions. The other is that economic growth requires that profits tend toward zero. Yes, they are ridiculous, but they are so commonly held (and believed so strongly) that they suggest a fundamental failure of economics education. Whether or not they are explicitly taught, it is easy to see how an economics education that focuses on models rather than understanding can lead to—if not create—such misperceptions.
“Markets Only Work under Perfect Conditions”
Introductory economics courses often take the perfectly-competitive model as a starting point so as to introduce students to economic thinking. It makes sense to do it this way. By assuming away complexities, students can be introduced to the economic way of thinking, ceteris paribus reasoning, and supply-and-demand analysis.
The approach is innocent but can be counterproductive or even destructive unless students also learn that a model is merely a simplified version of (and thus different from) reality. The model is not reality, and its assumptions are not real, but because of its simplified assumptions it facilitates analysis of reality. A model is a tool.
This obvious fact seems to not be communicated to economics students, who instead adopt the model wholesale as not only a description of but a necessary condition for reality. In other words, because the supply-and-demand diagram used on the blackboard relies on “perfect information,” many students conclude that real markets only work under such conditions.
It is of course the other way around: markets work because they solve or alleviate the problems that are excluded from the model. As Friedrich Hayek pointed out, there is no competition in the perfectly competitive model. All such activities are assumed to have already taken place so that the allocation under end-state efficiency can be explained—and the economic trend in markets therefore uncovered. But students somehow learn the exact opposite.
“Economic Growth Requires That Profits Tend toward Zero”
This idea is similarly a misapplication and misunderstanding of a model presented to students. In the static model of the economy, under assumptions of perfect information and zero transaction costs, economic profits will be zero. This is mainstream economists’ rather quirky explanation of economic efficiency: because all opportunities have already been taken advantage of, value production is maximized.
As follows from this model logically, profits tend toward zero as market reality closes in on “perfect” competition assumptions (that is, the problems are solved or alleviated). There is empirical support for this too: profits tend to fall in commodity markets and mature industries that are no longer innovative (the low-hanging fruits have been picked). Producers compete on cost rather than value. But this does not mean the economy is in an end-state; it only means some industries (such as grain production) have come to the end of the road in terms of product development—entrepreneurs see little or no opportunities for new value creation.
In reality, economic growth — more accurately economic progress — is the process of closing in on this highly theoretical end-state (which we as economists of the Austrian school realise is only theoretical—it cannot and never will be achieved). Our higher standard of living (economic growth) is the result of innovations that create more value—it is not the result of an absence of innovations.
Education as Disinformation
That students struggle with understanding the use and value of models, and may draw the wrong conclusions when studying market forces in the abstract, is unfortunate but understandable. It is the duty of the economics instructor to make sure students do not get the wrong ideas—that they go home with a greater understanding of how economies and markets work. Education, after all, should be enlightening and provide the student with new knowledge.
But somehow economics education fails to communicate the obvious fact that markets solve problems, not that they require that all problems have already been solved. And that economic growth is the creation of new value, not the absence of creating such value.
The failure of economics education is not merely the unproductive use of instructors’ and students’ time. As the above examples show, it is in fact destructive—students of economics get the wrong ideas and therefore graduate with less (not more) understanding of how markets and economies work.
Economics education with this outcome is disinformation, and we are better off without it.
* * * *
Dr. Bylund has published research in top journals in both entrepreneurship and management as well as in both the 'Quarterly Journal of Austrian Economics' and the 'Review of Austrian Economics,' and the author of How to Think about the Economy: A Primer — which you can get free here to kick off off your real economic (re)education. (His article first appeared at the Mises Wire.)
1 comment:
Infinite information, or zero profits are theoretical constructs that don't exist literally. Their purpose is to illustrate how things trend in a free market - towards more information, and towards less profit as knowledge about a particular economic problem grows. To claim that these trends need to be sufficiently advanced before a market functions properly is to get it completely the wrong way around. Putting the cart before horse, and then blaming the horse for the cart not moving. Instead, a market is the precondition for these trends to occur in the first place.
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