This thought is frequently thrown at me and other advocates of
laissez-faire, such as when protectionists allege that our endorsement
of unilateral free trade ignores "market imperfections" and other
"complexities" that aren't discussed in econ-principles courses. Ditto
for our opposition to minimum-wage legislation. ("Don't you know that
real-world markets aren't as perfect as they are in ECON 101
textbooks?!") Ditto, indeed, for almost every endorsement issued by an
economist for laissez-faire policies.
It's this thought that I wish here to discuss.
This thought - that serious discussions of real-world policies often
require more than knowledge of a freshman-level economics course - can
be interpreted to be trivially true...
But it does not follow - from the above rather trite, if true, concession - that a knowledge of only principles
of economics is "dangerous." My strong sense, from having carefully
observed public-policy making and public-policy discussion for nearly 40
years now, is that what is dangerous is a lack of knowledge of
principles of economics. The problem is not that most politicians and
pundits take economic principles too literally; the problem is that most
politicians and pundits are utterly ignorant even of these principles.
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 politician's policies are economically harmful and that his policy
statements are malarky.
The typical politician doesn't support minimum-wage legislation
because she has concluded, after careful study, that employers of
low-skilled workers have sufficient amounts of monopsony power in the
labor market (as well as monopoly power in their output markets) to
nullify the prediction of basic supply-and-demand analysis and, instead,
to create real-world conditions that enable a scientifically set
minimum wage actually to improve the welfare of most low-skilled workers
without reducing the employment prospects of any of them. No. She
supports minimum-wage legislation because she believes that raising the
minimum wage will result simply in all low-skilled workers getting the
stipulated pay raise without any negative consequences befalling these
workers. And most of her constituents - even those low-skilled workers
whose jobs are put at risk by the minimum wage - share her economically
The claim that I see many people (mostly on the political left) making is something like the following: "Oh,
principles of economics is too simplistic. Reality is so complex that,
when one learns advanced economics, the policy prescriptions that a
student takes from his or her principles course are typically shown to
be faulty. Here are some examples. The Minimum wage: Econ principles
show that it destroys jobs for low-skilled workers, but advanced
economics shows that it can be good for those workers. FDA regulation:
Econ principles show that it prevents consumers from gaining access to
pharmaceuticals that can benefit consumers, but advanced economics shows
that such regulation can be good for consumers. Workplace-safety
regulation: Econ principles show that competition for workers obliges
firms to supply optimal levels of safety, but advanced economics shows
why this conclusion is mistaken."
If claims such as these are generally true, then what is being taught as economic principles would be anti-principles.
If claims such as these are generally true, then what is being taught
as economic principles would be, at best, simplifications of reality so
extreme that they misinform students rather than inform them. If claims
such as these are generally true, then the typical econ-principles
student should demand a refund of his or her tuition and compensation
for being defrauded by his or her college.
But, instead, if what is taught in (good) principles of
economics classes (such as I am sure are featured at George Mason
University) is in fact solid principles of economics, then
principles-of-economics students are better informed about reality at
the end of the semester than they were at the semester's start. Such
students can use these principles as a generally reliable, if not
infallible, guide to understand reality and to predict the general
consequences of typical government interventions such as price controls
and trade restrictions.
Put differently, suppose that the knowledge conveyed to students of,
say, good introductory physics courses were analogous to the knowledge
of what people who disparage principles of economics believe is
conveyed to students of introductory economics course. In that case,
then the likes of Newton's Laws of Motion and Boyle's Law would be
downright misleading when used to understand most instances of
observed reality. Of course, in reality these basic laws of physics are
not misleading, although they also are understood not to reveal all
relevant details of the reality that they are used to describe.