ABSTRACT OF PAPER
Title: The main failure of Economics 101: Misleading students
Author: Boland Lawrence
Many if not most of us have had to teach the micro version of Economics 101. Most textbooks provide some basic methodological ideas. The most obvious idea in North American economics classes is of course about the virtuous nature of market competition and usually the unvirtuous nature of collusion. The least obvious methodological idea is methodological individualism when it comes to determining what is an acceptable economics explanation. The basic notion is that things do not decide; only people do. Methodological individualism is always involved – even today in macroeconomics – but is rarely discussed in economics textbooks. There is another essential idea rarely discussed, namely, equilibrium stability. Even though it is essential, unfortunately few textbooks ever properly distinguish between equilibria and balances. And as a result, few if any explain much about the necessity of equilibrium stability. I will illustrate all of this with a dialogue between an inquisitive student (IS) and an average economics teacher (ET). In this dialogue we see how students are misled about how convincing is the argument for reliance on the market to solve social problems. Market stability in textbook neoclassical models is clearly necessary for the normative conclusions often promoted in economics classes. Yet the logic of individual decision-making does not by itself ensure that only the usual demand and supply diagram is the true representation of the real world. The stability of the market is not obviously or implicitly endogenous. If non-stability is possible, there must be another way to ensure stability beyond analytically specifying mechanical responses to (positive or negative) excess demands or excess demand-prices. A not-so-obvious alternative is to explain the stability as an outcome of the learning process which is implicit in the recognition that every decision-maker’s knowledge of the decision situation is limited and thus the correct expectations must be learned as part of the process of reaching the equilibrium. The dialogue demonstrates that there is something quite unconvincing about what we teach in Economics 101. What is most unconvincing is that if one has to assume a priori the existence of a state of equilibrium to make any policy point whatsoever, the policy point must be unrealistic at worse and implausible at best. Economics 101 taught as is evident in the dialogue is dangerous and misleading if that is the only basis for politicians to understand the economy. Competition may be a good thing but it cannot just be because of the properties of a conceivable state of equilibrium. Clearly, assuming the existence of a state of equilibrium – long or short run – is almost always very unrealistic.
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