Econoclasm 101

I'm going to do a series in which I explain why most of what you read in the paper, see on teevee, or hear politicians say about economics -- how the economy works, and why we should minimize taxes and government intervention -- is utter gibberish. Here is the first lesson.

Introductory economics textbook writers are fond of proposing what they call “simplifying assumptions.” They invent cartoon worlds in which there are only two people with goods to exchange, or only two products for sale. They imagine how these worlds would work and then argue that these imaginings can be extrapolated to explain how the real world works. To the more realistic world of many people, many products, and many buyers and sellers they apply numerous other assumptions, without for the time being examining whether any of them are ever likely to be true.  

In the imaginary world of only two people, let’s say Alice and Bob, Alice has something that Bob wants more than she does, let’s call it X, and Bob has something that Alice wants, call it Y, that is worth less to Bob than it is to Alice. So if they exchange X and Y, they’ll both end up feeling better off. That’s called a transaction, and so it would seem to follow that whenever a transaction happens, the world is a better place because now both parties are happier. Obviously, if some busybody comes along and stops Alice and Bob from doing all the trading they want to do, they won’t be as happy as they could be. 

The endeavor from this point on is to inflate this into a claim about the real world of many people, many corporations, and innumerable products. A first order conclusion, without looking too deeply, would be that the way to the happiest possible world is to let everybody do whatever trading they want, of anything, with anybody. The posited “free market” economy, if left to its own devices, will turn out maximum prosperity, efficiency and utility -- a jargon word we’ll get to -- for all. Government just needs to leave it alone – an idea called laissez faire – French for “let do” – a phrase popularized in the 19th Century.  

Apart from a few ideologues – and they do exist – most economists understand that this is not actually true. The textbook will acknowledge that in certain special situations, there can be “market failures” that require some patching up. But these are usually presented as exceptions. Because Economics 101 gets around to reality as an afterthought, the fantasyland has gotten stuck in the minds of many people, including politicians, the journalists who write down what politicians say and repeat it back to us as conventional wisdom, rich people who really like to hear it, and a large segment of the public who are exposed to the idea, as at least a good approximation of reality. Politicians are fond of saying “It’s economics 101!” It might be, but that doesn’t mean it’s true. Next, I'll start to explain why.