The Perils Of Having A Little Knowledge

James Kwak at The Baseline Scenario has a post that fits my own educationalo experience to a “T”:

The Perils of Studying Economics

Patrick McGeehan at the New York Times recently wrote about a New York Fed study finding that studying economics makes you a Republican. The headline conclusion is that the more economics classes you take, the more likely you are to be a Republican...

...Studying economics also affects your position on several public policy issues. Of seven issues, economics courses were significantly associated with the five following positions (Table 6):

-Tariffs are bad.

-Trade deficits are not so bad.

-The government should not cap oil prices in response to a supply shock.

-Raising the minimum wage increase unemployment for low-wage workers.

-Income distribution should not be more equal.

These are all pro-free market, anti-government intervention positions.

What I thought was particularly interesting, however, was that on some issues people who study undergraduate economics are more doctrinaire free marketers than professional economists...The Ph.D. economists were more likely than economics majors to hold the textbook position on tariffs or the minimum wage. However, they were also more likely than economics majors (or, frankly, any majors) to think that income inequality should be reduced and that government spending should not be reduced, and they were somewhat less worried about federal budget deficits.

This is something I’ve mentioned in passing often. I think that basic economics, the way it is taught today, tends to give people reflexive pro-free market, anti-government positions — positions that are not held by people with a deeper exposure to economic thinking. When your understanding of government finances is based on reading the newspaper, it’s somewhat eye-opening to come to college and learn that free markets lead to maximum societal welfare and taxes impose a deadweight loss on society — the pictures are so simple and compelling. That’s why a little bit of economics makes you more likely to be a Republican.

But when you learn more about principal-agent problems, information asymmetries, and so on, you learn that those simple pictures are simplistic to the point of being misleading. That’s why Joseph Stiglitz argues in Freefall that understanding economics is crucial to understanding why free markets often lead to suboptimal outcomes. The problem isn’t knowledge per se; it’s a little bit of knowledge.

Notwithstanding my position on subsidies, I’m not in the camp that says that all government intervention is bad, and all policies that create freer markets is good. It depends very much on how intelligently government policy is designed.

There is a good case for saying that, by definition, government policy cannot in fact ever be as truly efficient or effective relative to a free market-based solution. But if market solutions themselves result in suboptimal social welfare outcomes – not unreasonable since few if any real world markets have the necessary characteristics for full efficiency; nor do market solutions always have a moral or social welfare dimension – then government intervention is a valid second-best solution.

Too much of undergraduate economics is based on basic neo-classical/neo-Keynesian theory, which while necessary as a foundation, doesn’t go into the nuances that colour the application of these theories in a real world context. Nor is there any exposure (even at the graduate level) on alternative/heterodox schools of economic thought – you have to discover those on your own.

Spreading knowledge of economics is good, as I’ve always thought of basic economic theory as thought at the undergraduate level as primarily a framework for thinking and discussing policy issues. We’d have a better public discourse on policy and social issues. But as James says, a little knowledge is more dangerous than ignorance – the last thing we need is a revival of the Washington Consensus.