Top Ten False Assumptions Taught In My Economics Classroom

December 8, 2012 § 11 Comments

Or – Why Seeing The World Like An Economist Is Screwing Up Our Society And Our Planet.

Each of these ideas has been taught in my Introduction to Microeconomics class at the Harvard Kennedy School over the last three months. No doubt there are valid and useful models that deal with some of the issues below – but these were never pointed to or explained in class.

I share these to point to the worldview that traditional economics holds, and that this is what future policy makers are taught as standard. For alternatives, check out the New Economics Foundation.

1) Self-interest is the only thing that motivates human beings. This is only one side of the human story –  what about empathy, for example? Further, have a read of Amartya Sen’s rehabilitation of Adam Smith. His ‘invisible hand’ theory was about much more than self-interest.

2) There are productive and unproductive people. ‘There are two types of people – high productivity people and low productivity people. They are born like this and can’t do anything to change it.’ The idea that productivity is only what can be measured through GDP is flawed – NYT times explains why.

3) More is better. Is it? Not at the expense of other necessities like human connection, meaningful work etc.

4) Market equilibrium is socially optimal. ‘Subsidies make people buy things they shouldn’t be buying.’ Similarly, on subsidies – ‘Let’s screw the market up’. The normative language around ‘market distortion’ reveals the assumptions underneath the statements.

5) There are no limits to natural resources. Obviously.

6) Humans are rational actors. ‘Individuals can constantly and consistently rank different consumption baskets [what they want]’. Simples.

7) Survival of the fittest. Rather than, as natural selection theory intended, survival of the fit enough. The market is seen as a zero-sum game, rather than an ecosystem of multiple species coexisting.

8) The government wants to take ‘your’ money. ‘The minute you leave the firm, there is an IRS [HMRC, in the UK] agent at the door saying “you’ve gotta give me money”‘. Right.

9) Utility maximisation theory is true: so that the moral worth of an action is determined only by its resulting outcome. The irony is that over the last three months in our Ethics class, we have debated and debunked this very worldview.

10) Pollute poor people, not rich people. ‘Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the Least Developed Countries? A given amount of health-impairing pollution should be done in the country with the lowest cost. I think the economic logic of dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.’ Larry Summers, former President of Harvard in a memo. This quote was put up on the board in our final class, without discussion, to hammer home what we should have learned this semester.

Now, I should get back to revising for that economics exam on Wednesday…

§ 11 Responses to Top Ten False Assumptions Taught In My Economics Classroom

  • I agree with your first ones, I wish I understood the exact mechanisms that lead to ideas as become fixed. I wonder if its simply intellectual convenience.

  • weaver says:

    Well, people are rational and people are motivated by self-interest. Just not the same people.

  • Jamie says:

    Great post, Casper. I think it would be great if you more precisely pin-pointed the fact that broadly speaking it’s “neoclassical” economics that holds these assumptions. That could help us move forward to a better theoretical framework more quickly.

    Also, regarding point 6), I would add that not only does the theory assume that individual consumers are rational in choosing the contents of their ‘baskets’, but that they have a finite budget to spend. The widespread availability of consumer credit in various forms (from student loans to credit cards to mortgages to the credit that comes with phone contracts to Wonga) means that this assumption is incredibly flawed.

    Somehow (and completely inexplicably, even by the flawed logic of neoclassical economics), economics debates focus almost exclusively on Government debt, barely looking at the structural (and psychological) problems around consumer debt and the fact that our current economic system encourages the perpetuation of this flawed consumer credit system, simply in the name of increasing spending and associated GDP.

  • Paul hays says:

    Nice list. But you forgot the idea of comoditization of everything. The only worth of a tree is measured when you cut it down, saw it up and sell the boards. No way to measure the value of shade in a park, or climb ability. Some work is being done in this area, Economics needs to work on Multi-variable measures of value. Of course this complicates the data collection and math greatly, but a systemic view of the economy demands it.

  • […] Deze blogpost werd eerder gepubliceerd op Casper’s eigen blog. […]

  • […] in favour of constructing elegant mathematical ‘castles in the air’ to support a set of clearly ridiculous assumptions about how humans think, behave and are motivated. Delusions happen and always have, but […]

  • Nele Marien says:

    Thanks this is really a good post.
    Nevertheless, I think economics are very important to understand the (mal)functioning of the world.
    But indeed, if the basic premises on which we study economics are so flawed, then the results of this analysis will be flawed as well. And such will be the politics based on the analysis.

    I am not an economist, even though I studied some, and years ago I found some economists that developed different economic models, based on different premises, and the results were of course very different, e.g. very critical towards the neoliberal model. Unfortunately I lost track of these economists. Do you have access to alternative economic models?

    Kind greetings,

    Nele

  • intrepidy says:

    More than anything, this post illuminates your lack of understanding of economics. You clearly conflated in post #9 utility maximisation theory with utilitarianism, and the two aren’t the same whatsoever. At best, they’re tenuously related. If you think that economics teaches that self interest is the only thing that motivates human beings, you either didn’t understand your teacher or had a bad one.

    I could go through point by point and demonstrate how flawed your thinking and interpretation of mainstream economics, but that would be a bit laborious. Needless to say, you’re wrong about almost everything.

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