A Sixth-Grade Explanation of How Economics Has Gone Off the Rails: Out of the Mouths of Babes…

A reviewer of Yves Smith’s book, ECONned, who is a recent Harvard Ph.D. and who has also taught middle school math, has a primer on economics, written as if it were a sixth grade level textbook. What’s terrifying is that, if you are actually familiar with the economics, it’s very accurate. Consider (boldface mine):

Meanwhile, Paul Samuelson was writing his dissertation, and he saw how angry the people had gotten with Tarshis [a Keynesian who was accused of being a Communist after publication of his synposis of Keynesianism]. He decided to make it so his dissertation could not be attacked in the same way. So he did three things, writing very “carefully and lawyer like.” First, he changed Keynes’ ideas a little bit so that in Samuelson’s version of them, they said that corporations in the capitalist system would always give everybody a job as long as the government and labor unions didn’t bother the corporations. That made corporations happy with him, so that they didn’t think people should call him a communist. Second, he called his ideas “neoclassical synthesis Keynesianism.” That made other economists think that he wasn’t changing their ideas very much, so they were more happy to support him. Third, he wrote all of his arguments up in mathematical form. Now why would he want to write up his ideas as mathematical arguments?

Well, for one thing, a lot of people don’t understand complicated math, so he could automatically win arguments with someone who didn’t understand math. Even the people who went around calling people communists couldn’t call him a communist if they didn’t understand the math he was doing. There was another reason, too. Samuelson could turn problems that economists used to argue about into equations. Then he would solve the equations and the argument would be over….

Later on, in the 1950′s, two economists named Arrow and Debreu made a simplified mathematical model of the economy, and proved that in their model, there would never be a time when people wanted to buy something and nobody would sell it to them. Economists thought that this was very exciting. Now they used math even more.

Nowadays, most papers on economics have equations in them. All economists have to be able to talk about their ideas using mathematical models and statistics, or other economists won’t respect them. This is part of what is called being able to “think like an economist.” It is a special ability that you can only learn by going to graduate school in economics. A professor named David Colander surveyed economics graduate students to find out which of seven factors were most important in order for them to succeed in graduate school. The top three factors all had to do with being good at math. The least important factor was having “a thorough knowledge of the economy.”

So learning how to “think like an economist” is very important, because if you don’t do it, then no matter how well you understand the actual economy, economists still won’t take your arguments seriously.

And:

One day, some economists noticed that if you’re playing cards, if you peek at someone else’s hand, then you’ll probably win more than someone who doesn’t peek. That’s because you know your cards and their cards and they only know their own cards. The economists who noticed this called it “asymmetric information.” Since economists before that assumed “perfect information,” so everybody playing cards knows everybody else’s cards, they were amazed at how smart these economists were and gave them Nobel Prizes.

Another day, some economists noticed that sometimes people are stupid and do things that waste money. They made a theory about this called “behavioral economics.” Since economists before that assumed “perfect information,” [and rational expectations] or in other words, people know everything that is happening everywhere in the world and always do whatever makes the most money, they were amazed at how smart these economists were and gave them Nobel Prizes.

There were also some economists who noticed that if you give another kid your lunch and tell him to hold it for you until lunch, he might eat your chocolate bar and then tell you that someone stole it. Their theory is called the “principal/agent dilemma.” This theory also seemed very new and exciting to other economists.

When people started making fun of economics because economists hadn’t realized that there was going to be an economic crisis, some economists like Eichengreen and Rodrik told those people that they were wrong and economists could have been able to know that there was going to be a crisis. Eichengreen and Rodrik said that the only problem was that economists hadn’t used the new theories like asymmetric information, behavioral economics, and principal/agent theory, but economists would remember and use them next time.

But since all of the new theories are different from the old economics, what usually happens is that economists use only one of them at a time. If they got rid of the old economics completely, then other economists who like the old economics would be angry at them or not pay attention to them. So they use the old economics and then add on a little bit of the new economics and hope that it works.

Like I said, it’s terrifying because it’s accurate.

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2 Responses to A Sixth-Grade Explanation of How Economics Has Gone Off the Rails: Out of the Mouths of Babes…

  1. Yes, it is accurate, yet not as hopeless as it seems. Economic system is very complex, there are diffrent sides of the system , everything is intertwined. Remember the buddist parable about elephant and blind monks? It is impossible to reconsile all monks’ perceptions about elephant, but it is doable. I am suggesting one more angle, may be laughable too, (may be not)-to look at economy as a dynamic non-linear complex system, with positive and negative feedbak loops-and math ideas (not necessarily technics) could be really instrumental along the way. Yes, understand first the system at some level, use proper math, and understand it better and at a higher level. The Luddist approach to math (luddists used to break machines, if you remember) is not productive.
    If interested, visit agzanegi.wordpress.com
    Andrew

  2. katefromiowa says:

    Wow. Is that really sixth grade level? I know I was AP/TG, but that sounds more like what I remember of my third and fourth grade textbooks, than my sixth.

    But then, the educational system’s been in the shitter for at least twice as long as the economy has…and I’m counting all the way back to the beginning of the disaster, right after Clinton. Hell, even while Clinton was in office, it wasn’t that great for a large segment of the population that had just had thier welfare rather savagely cut.

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