David R. Henderson  

Boudreaux on Economic Principles

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Questioner: How's your wife?
Henny Youngman: Compared to what?

I thought of this old Henny Youngman joke while reading Don Boudreaux's excellent post this morning, "On the Principles of Economic Principles."

Don is responding to a statement from blogger Ezra Klein: ""There's nothing more dangerous than somebody who's just taken their first economics class."

I was stunned when I read that statement. Nothing more dangerous? How about someone who hasn't taken his/her first economics class? Thus the Henny Youngman joke above. Don nicely lays out what you can learn in your first economics class. It does depend, of course, on who teaches it. You'll probably learn a lot about market failure and little about government failure. So on that I can agree with Ezra, although I don't know if that's what he was getting and I strongly suspect that it wasn't. But you'll also probably learn that free trade is generally good, if you care about people's welfare as seen by people themselves, that rent control destroys housing, that the minimum wage destroys jobs for unskilled people, and that high profits in an industry attract entrants, assuming that government doesn't prevent entry.

Don then goes on to point out, in a Bryan Caplanesque way (and I mean that as a high compliment to both Don and Bryan) that the politician who criticizes free trade doesn't do so because he/she has a sophisticated view of free trade, but, rather, because he/she doesn't understand the first thing about free trade.

Don writes:

The typical politician does not oppose free trade because he took an advanced econ course and learned there that, under just the right combination of real-world circumstances, an optimally imposed tariff can be justified on economic grounds. No. The typical politician opposes free trade because he doesn't understand the first thing about economics. He doesn't understand that the purpose of trade - any trade - is to enrich people as consumers and not to enrich people as producers. He doesn't understand that exports are a cost and that imports are a benefit; he thinks that it's the other way 'round. He doesn't understand that the specific jobs lost to imports are not the only employment consequences of trade; he doesn't understand that trade also 'creates' jobs in the domestic economy. He doesn't understand that domestic producers protected by government from competition have diminished, rather than intensified, incentives to improve efficiencies of their operations. He, in short, doesn't understand the first damn thing about the economics of trade. And nor do most of his constituents. If these constituents understood basic economics and basic economics only, they would better understand that this politicians' policies are economically harmful and that his policy statements are malarky.

I do have one criticism of this. Don writes above:
He doesn't understand that the purpose of trade - any trade - is to enrich people as consumers and not to enrich people as producers.

Each trader has his own purpose. There's not the purpose. If the two people trading are consumers, then Don's statement is absolutely true. But if one is a producer, it's absolutely false. The producer is trading because he/she hopes to gain as a producer. Now, of course, the ultimate end of production is consumption. But when I teach gains from exchange, I show that the gains to the consumers are measured by consumer surplus and the gains to producers are measured by producer surplus.

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CATEGORIES: Economic Education

COMMENTS (16 to date)
Don Boudreaux writes:


Thanks for this nice post and for your recognition of mine on this matter over at Cafe Hayek. Because I like your post so much, and because I'm grateful for your kind words, I hesitate to express any disagreement - but we're friends. :)

I don't believe that producer surplus is fully comparable, utility-wise, to consumer surplus. Or, rather, I think that because the ultimate purpose of all economic activity is to improve our standards of living (loosely described as 'increasing our consumption'), what ultimately matters is how well an economy serves us as consumers. How well it serves us as producers (say, by maximizing our producer surplus) is a means to a higher end; how well the economy serves us as consumers (say, by maximizing our consumer surplus) is the end itself.

This reality - the reality that economic activity should be judged, ultimately, not as the mercantilists judge it (by its effects on us as producers) but, rather, as Adam Smith judged it (by its effects on us as consumers ["Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer."]) - is the one that I sought to convey in that part of my post. My strong sense is that too much public discussion of trade incorrectly presumes the mercantilist perspective to be the correct one.

Brian writes:

I would think that Ezra Klein's statement is along the lines of "a little knowledge is a dangerous thing," which is based on the idea that people who know a little might know enough to attempt to apply that knowledge but not enough to do any good with it, and in fact do harm by their lack of sophisticated knowledge. Whether that applies to ECO 101 would depend on whether the typical ECO 101 student becomes highly confident in his or her economic abilities and starts applying it poorly. While I would hope that ECO 101 imparts that kind of confidence, I highly doubt that it does.

Craig Richardson writes:

Politicians are maximizing votes, so even if they understood economics, I don't think the problem would go away. There are plenty of politicians who employ preference falsification. That said, here is a list of politicians who voted "for" and "against" the TPP in the Senate. At least we're making headway..


Greg G writes:

Don says up front in that post that he did not listen to the podcast and is guessing at what Ezra meant.

If you listen to the first 6 or 7 minutes you will see that he is guessing wrong.

Ezra was not taking some kind of partisan shot at free market economists. He was just making a joke about how "insufferable" a student can be who has taken his first economics class. Guest Arthur Brooks laughed and agreed with the observation.

Sometimes it's remarkable how little it takes to fire up the blogosphere outrage machine and stun people.

Quinn writes:

Need to get those votes, and appealing to the populous works. Of course, I don't know anybody myself who would prefer to give more of 'X' in exchange for less of 'Y'.

David R. Henderson writes:

@Greg G,
Thanks. That will teach me, yet again, to do due diligence.

Greg G writes:

I appreciate your gracious reaction David and I do realize how much easier it is to take potshots as a commenter than to run a blog.

Michael Byrnes writes:

Greg G wrote:

Don says up front in that post that he did not listen to the podcast and is guessing at what Ezra meant.

I didn't read it that way. He took a brief guess at what Ezra might have meant and then shifted to a different point: how Ezra's "econ 101 critique" is sometimes used to criticize libertarian ideas and Don's own response to that criticism.

I would agree, though, that Ezra's interview of Arthur Brooks was fantastic and well worth a listen.

ThomasH writes:

I think Klein was talking about the politicians who oppose a minimum wage increase because it can cause unemployment without thinking about whether there are other ways to transfer income to low wage workers like EITC.

Anonymous writes:

I think the fundamental dispute here is: does Economics 201 totally overturn Economics 101? Or does it just expand on it in many ways, one of which is exploring corner cases and exceptions where the normal rules don't apply?

Khodge writes:

I never had an econ class that did not teach Keynesian economics as mainstream and never bothered pointing out that that was what it was doing. While I knew that I was missing something, it was not until I struck out on my own that I was able to find economists who did not recognize the magic multiplier that would change one dollar of government spending into nine dollars.

So I do think we are better off not teaching budding politicians elementary economics.

Michael Byrnes writes:

Anon wrote:

I think the fundamental dispute here is: does Economics 201 totally overturn Economics 101? Or does it just expand on it in many ways, one of which is exploring corner cases and exceptions where the normal rules don't apply?

The way it looked to me, Don B. sort of used Klein's comment as a jumping off point to make a related but different point. Or two different points.

1. Statements similar to Klein's are often used to criticize free market economists.

2. Contra Klein's statement about Econ 101 classes, the basic principles of economics are in no way dangerous. Rather, quite the opposite.

Personally, I don't know as I would necessarily equate "having taken one economics class" to "understands the basic principles of economics".

ThomasH writes:

Don's is a quibble, but a correct quibble. Of course with optimal policies, producers' surplus will ultimately be correctly valued as consumption.

Nathan W writes:

Someone who has never studied any economics has no pretentions to think that they understand the economy very well.

Someone who has taken an introductory course in economics is fed a series of simplistic models peddled as pure truth, and thinks they know everything they need to know about the economy on the basis of what they learned in first year economics.

First year economics gives these people the ability to use language that might be persuasive in leading others to believe their credibility on matters of the economy, but leaves them basically completely unequipped to address reality, which is far more complex.

I suggest the following strategy to protect against this: For every matter of dogma in first year economics, students should have to learn at least two examples of how reality sometimes fails to validate these theories which are only partial (90%?) reflections of reality.

Moreover, they should be required to parrot at the end of every exam answer "Reality, of course, is far more complex than this and after first year economics I am completely unprepared to elaborate on what that means for any practical purposes."

A little knowledge is indeed a dangerous thing.

Maniel writes:

Where is Common Core Economics when we really need it?

JK Brown writes:
Someone who has never studied any economics has no pretentions to think that they understand the economy very well.

One can go to any news source, especially in these campaigning days, and see that statement is false.

But you are correct that the uneducated* student having been exposed to Econ 101 will not realize that what they learned was carefully constructed to avoid ambiguity. Ambiguity being what further instruction in field creates with their caveats and addendum to those once so firm principles if only reality was so simplistic. But by the same purpose those principles are the anchor for one working near the edge of knowledge since once the complications have been compensated for the trajectory must arrive back at the principle.

Those who've never studied are unlikely to even conceive of the principle they are anchored to and must explain how their "different this time" doesn't completely untether their assertion from the basic case.

*"Education, properly a drawing forth, implies not so much the communication of knowledge as the discipline of the intellect, the establishment of the principles, and the regulation of the heart." As opposed to teaching, instruction, training, etc. which do communicate knowledge.

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