Wednesday, June 27, 2007

Econ 101 Introduction

I finished reading a fantastic and important book called The Myth of the Rational Voter by Bryan Caplan. This book has important implications for Public Choice economics, but more interestingly (I hope) for the general reader of this blog, it has implications for how I teach my economics class.


Traditionally I started out by defining economics, talking about trade-offs, and then diving into the Production Possibilities Frontier and other models. Now I think I'm going to start out differently. Here's my very rough sketch of my introductory lecture so far (quoted section is in blue):

-Introduce self, check names, review syllabus


-Begin with questions; do not state category headings:


Before we start, I have some questions for you.



(Anti-market bias)


1) Raise your hand if you believe we should have farm subsidies to ensure that farmers produce enough food for us to eat.


2) Among those of you who raised your hands, keep your hand up if you believe we should have clothing subsidies to ensure that clothing companies produce enough clothes, computer subsidies to ensure that computer manufacturers produce enough computers, and automotive subsidies to ensure that automobile manufacturers produce enough cars.


3) Hands down. Raise your hands if you would be in favor of doing something that would help one million homeless people find homes, food, and medical care.


4) Among those of you who raised your hands, keep your hands up if you would be still be in favor of doing something that would help one million homeless people if it earned a business $100 in profit for each homeless person helped. $1000? $10,000?



(Anti-foreign bias)


1) Raise your hand if you are concerned about the destruction of American jobs and businesses by imported goods from China.


2) Among those of you who raised your hands, keep your hand up if you are concerned about the destruction of Tennessee jobs and businesses by imported goods from Kentucky.


3) Hands down. Raise your hand if you are concerned about immigrants from other countries taking American jobs or putting downward pressure on American wages.


4) Among those of you who raised your hands, keep your hand up if you are concerned about people from Michigan taking Tennesseans' jobs or putting downward pressure on Tennesseans' wages.


5) Hands down. How many of you agree with the following: "Foreign aid makes up roughly forty percent, or less, of the budget."


6) Keep your hand up if you agree that "Foreign aid makes up roughly 30 percent, or less, of the budget". What about 20 percent? 10 percent? 2 percent?



(Make-Work Bias)


1) Raise your hand if you believe that hurricanes, while devastating to the lives of the people they afflict, at least have the side benefit of creating a lot of employment for people who work in rebuilding and cleanup.


2) Keep your hand up if you plan to repeatedly tear down your own house so that you can have the benefit of doing the work of rebuilding it.


3) Hands down. It is currently illegal for car manufacturers to sell cars directly to consumers. Rather, you must, by law, go through an independent dealership. Raise your hand if you agree with the following: "This is a good law because it protects the employment of dealership employees, many of whom would be out of work if manufacturers could sell directly."


4) Keep your hands up if you believe that we could create even more jobs by adding a "dealership dealership", requiring buyers to contact an independent dealer in dealerships, who then puts you in touch with a dealership, who then sells you a car. How about a "dealership dealership dealership"?



(Pessimistic Bias)


1) Raise your hand if you believe that, compared to the average American in 1900, an average American today is roughly 50% wealthier, in terms of material goods.


2) Keep your hand up if you believe that an average American today is twice as wealthy. Three times as wealthy? Five times as wealthy? Ten? Twenty? Thirty?


3) Hands down. Raise your hand if you believe that, with the way the world is headed, the U.S. economy will, probably stop growing within fifty years.


This class is about correcting biases. The answers that economists give to the above questions are usually very different from the answers non-economist provide. One possible explanation is that economists are wrong, but I doubt that answer would occur to you if I were giving counterintuitive results from, say, physics, or chemistry. People tend to trust experts because experts tend to be correct. Another possible explanation is that economists are biased because they're all conservatives, but in fact, the average economist is a moderate Democrat. One could also argue that economists' beliefs are biased because economists are wealthy, and they're really just arguing for policies that are in their class interests. Yet if one looks at the economic beliefs of wealthy people, they are not the same as those of economists.


The best answer is that economists know something that you don't. Noneconomists tend to suffer from biases in their economic thinking. This could occur because of bad education, or cultural norms. These errors are so pervasive across time and geography that I tend to believe they are the result of evolution, hard-wired into us by tends of thousands of years of pre-historic subsistence, when exchange and trade as we know it today did not exist


Whatever the reason, these biases persist, and the goal of this class is to erase them, replacing them with economics. In Bryan Caplan's book The Myth of the Rational Voter, Caplan identifies four economic biases. There are other economic biases (for example, the tendency to think of the number of jobs as fixed), but Caplan's list is very good, and enough for this introduction. The four biases are:


Anti-Market Bias: Non-economists tend not to believe that markets work well. They are suspicious of profit motive, and tend to see exchange as zero-sum--that is, whatever one side gains, the other must lose. Economists believe this view is almost completely wrong.


Anti-Foreign Bias: Non-economists tend to be suspicious of trade with foreigners, and of immigrants from other countries. It is unclear exactly why this is so; non-economists are not usually concerned about similar movements by their fellow citizens. Economists tend to believe that an arbitrary and imaginary line is not important (at least when it comes to trade).


Make-Work Bias: Non-Economists tend to see conserving labor as a bad thing, rather than a good thing. That is, the destruction of jobs is abhorrent, and the creation of jobs is always and everywhere desirable. Economists, by contrast, believe that some job destruction is not only necessary, it is healthy. Furthermore, economists do not believe that creating more jobs (or preserving existing jobs) is always a good thing.


Pessimistic Bias: Non-economists tend to underestimate the effects of economic growth in the past, and underestimate the future growth of the economy. Economists complain quite a bit about policies that reduce growth (and policies which are generally harmful), but that is because economists appreciate the huge effect growth has had upon our standard of living. Economists also believe that economic growth will, for the most part, continue into the foreseeable future.


As to why these biases are wrong, and why you should think like an economist, we will get to that over the course of the semester. Some of these subjects will be covered in Econ 102, rather than this course. For example, Economic Growth is usually a topic covered in a Macroeconomics class, rather than a Microeconomics class. By the end of this course you should be able to articulate the simple arguments in favor of markets and trade, even if you do not agree with them.



How would you answer the questions? What biases do you have? For what it's worth, I can think of one more reason why people might not believe economists: Macroeconomic forecasts are not very good. people might infer from this that economics in general is not very useful, but that would be a mistake. There is much more to economics than economic forecasting, and while economists disagree over some subjects (such as macroeconomic theory), there is a great deal about which they agree.

5 comments:

Greg Brown said...

Louis Menand offers up a good critique of the book in the latest issue of The New Yorker.

He did another piece on competing explanations of voter behavior back in 2004 that was excellent as well.

Ian McMeans said...

You should explain that part about the reliability of economic forecasts to your class.

Mike Hammock said...

Almost all of Menand's article is a summary, not a critique. The first two pages (and part of the third page) are a good and fair summary of the book's major arguments. The last few paragraphs contain the only real criticisms. One paragraph argues that people are even more irrational than Caplan believes, which, it seems to me, strengthens Caplan's argument, rather than weakening it. The last two arguments are vague hand-waving about stability. Menand makes almost exactly the "Democratic Fundamentalist" argument that Caplan refutes at the end of the book--democracy's solutions to messy problems are, according to Menand, the best possible outcomes by definition, because everyone got to participate in the decision. That isn't an argument; it borders on religious belief. Is there evidence that there is a tradeoff between stability and efficiency? Must efficient policy lead to an unstable political system? Is Menand willing to carry his argument through to, say, freedom of speech? Should we subject all speech to this messy negotiation, rather than having a simple anti-democratic rule, for the sake of stability? (I suppose that one could argue that, in effect, we do this now, although I don't think that is really consistent with the First Amendment.)

The second piece strikes me as a good and fair summary of theories of voter behavior. I don't think it's necessarily at odds with Caplan's argument.

Ian McMeans, I have indeed talked about the reliability of macroeconomic forecasts in my macro classes. I suppose I should start mentioning them in Econ 101, too, although I don't want to get too far off topic. If Caplan's arguments are correct, an Econ 101 class will be more successful if instructors focus on a few important points, with as few distractions and caveats as possible.

Martin said...

Sorry to say. Caplan’s book is full of illogical and contradictory arguments, mangled terms, cultural prejudice, and a whole lot of other weaknesses. It’s also pretty scary when you really think about what he is arguing for. Like a lot of cloistered academics, he’s hermetically sealed inside his own thinking and theories, and totally unhinged from the real world... past and present. I won’t recap the whole list of objections here... but it’s on my site. (literalmayhem.com)

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