Wednesday, August 30, 2017

Teaching Econ 101

In Adam Smith's day, it was moral philosophy.  But for many years, that has been replaced with what Deirdre McClosky calls Max U (or Samuelsonian or standard textbook) economics.  It has not been a good trade.

When natural disasters occur, supply and demand is a lifesaver. It is the way to reallocate resources to stricken areas (people). Price signals do their work when they are allowed to reflect new realities: when they ration on the demand side and elicit on the supply side.  But banning price hikes (anti-gouging laws) stymies both adjustments, making bad situations worse.

This is simple and clear.  But we teachers of Econ 101 have seemingly not done the job of imparting simple ideas like this. Look at the protectionist utterances of Wharton grad Donald Trump -- and many, many others. (I notice that ABC_TV news loves to report on products that are Made in America.)

In light of the Houston floods, the usual suspects are arguing for price controls ("anti-gouging laws) and thereby claiming the moral high ground.

Teachers of Max U note the fine points of efficiency when they should first deal with Question #1: in which settings are people most likely to have better lives?  The most noted thought experiment of our time may be John Rawls' "veil of ignorance": when considering political choices, do not think of where in the wealth distribution you are but where fate might deposit you.

Do you want to be inside or outside an exchange economy? If it's a hard choice, look at the real world and place yourself behind a veil of ignorance.

Perhaps if we taught this first and Max U second, there would be fewer grating rants about the immorality of markets.


And while we're at it. Here is how young people view socialism vs capitalism.