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How My Naïve Perception of the Economics Profession Eventually Changed

It was my senior year of high school at Trinity Christian High School. I was required to write a 20-30 page senior thesis throughout the year in order to graduate, and that thesis was required to outline 3 things: my personal religious beliefs, a defense/argument for a particular issue, and (most importantly) how my worldview would influence my professional career.

At this point in my life, I knew I wanted to major in economics — but now as I think back, I have no idea why. It was 2009, so the financial crisis was still at its peak, and for some reason I was fascinated by the title, “economist.” I thought that after years of studying economics, I would be able to intelligently and accurately predict and explain economic conditions. I really had no idea what that meant. When I told people my plan to major in economics in college, they would comment by saying, “Oh, that’s great! We need bright people like you who will figure out how to get us out of this mess.”

I agreed with them.

For my thesis, I had to personally interview an economist, and looking back at questions I had for him, I realize how naïve I really was. My questions assumed a lot of things. I assumed that economists could prescribe policies to combat recessions, that their main mission was to provide the most good for the most people, and that through years of study, a few economists could get together in room and fix things because they were intelligent and well-schooled. I guess I was excited to eventually become the hero who could make a positive impact on the world through economic policy.

I arrived at college with a sense of excitement and optimism, not just because it was a new stage of my life, but also because I would soon be learning the “secrets” of the economics profession. I couldn’t wait to enroll in econ classes. Introduction to microeconomics didn’t really appeal to me because it didn’t line up with my expectations, but I knew it was probably necessary to lay a foundation before moving on to more complicated things. When I moved on to my intro to macroeconomics class, I was immediately hooked. Even though my professor prefaced most of his lectures by saying that the models in the intro class were oversimplified for simplicity’s sake, the models showed a direct relationship between economic policy and results — and apparently these models worked beautifully. I felt well on my way to being enlightened. I was learning how to fix the economy, little by little. This is just what I was looking for.

Then I happened to read a book that would ultimately change my life: Ron Paul’s “The Revolution: A Manifesto”.

Dr. Paul’s book planted the seeds for a healthy skepticism that would lead to a drastic transformation in the way I thought about economics and its implications for my professional future. I started to read more outside of the classroom. I found the works of classical economists such as Frederic Bastiat, F.A. Hayek, and Ludwig von Mises thanks to resources provided by organizations such as Students for Liberty and the Foundation for Economic Education.

As time went on, my optimism quickly faded. I realized the whole game had been too good to be true. Very fundamental problems in mainstream economic theory started popping up all over the place. The broken window fallacy, Bastiat’s basic “seen and unseen” analysis, faulty assumptions in monetary theory relating to deflation, assuming homogeneous capital, forgetting the relationship between time, interest, and capital in creating the production structure, the knowledge problem, the true definition of economic growth, the conflicting mandates of the Federal Reserve, the unintended and forgotten consequences of artificially low interest rates, the importance of prices in allocating resources, and the effects of government spending on the economy, etc. — they all led me to rethink economics and how we teach it, learn it, and apply it. This is what I have learned in the past 3 years:

1. Economic theory can describe, but it cannot prescribe.

There are some economic principles that hold true. Incentives matter, people are rational in always wanting to make themselves and their families better off, and there is no such thing as a free lunch. Unfortunately, we try too hard to model these laws across millions of people with an infinite combination of preferences. HUGE assumptions are made in determining the endogenous and exogenous variables in these models. Just one example is applying one MPC (marginal propensity to consume) to an entire nation or state or even a city – assuming that on average, people consume 90 cents of every dollar they make is a ridiculous assumption, and that’s one of the tame ones.

We often forget that we have a ceteris paribus constraint when developing macroeconomic models that actually directly influence fiscal and monetary policy. How can you make policy based on a theory that assumes “everything else constant”? This is mind-boggling to me. Economics describes how things work. It does not address how the world should be; in fact, it often describes exactly why the world can’t be a certain way (usually a Utopian society in this instance). Even if we had population parameters instead of sample statistics to use for data analysis, any kind of policy to combat negative economic influences or shocks would instantly be outdated, and that isn’t even considering the amount of time the policy takes to implement. The economy is organic. It is made up of individuals, engaging in trades with one another that make both parties better off. The economy is not a machine, or a country, or a state. Therefore we cannot treat it as such.

2. The economics profession has incentives that lead to guaranteed errors.

It’s a very vicious cycle, really. Economists, most of who work directly for the government or state-subsidized institutions, influence economic policy and the consensus among academics. It is in their own interest to push for more government spending or pro-interventionist economic theories that will keep their jobs secure. As much as this sounds like a conspiracy, it’s not. It’s rational behavior with respect to the incentives of the system. This is why Keynesian economics is still so prominent today. It justifies more spending by the state, which helps politicians get reelected. Quite sad if you ask me.

3. Academia and the way we view education is really screwed up.

Academia is slow to change. Extremely slow. Innovation in education (with the exception of technology for the most part) crawls along, and is hampered by resistance to change amongst faculty. Once again, that’s partly due to the system. Professors spend 12+ years in school and countless more years researching the theories they learned in those first 12 years. If someone approaches them with a new perspective or a problem with the stuff they have been teaching for 30 years, some professors will take it personally, and others will just shrug it off as undergraduate ignorance. Professors are very prone to hubris and pretentiousness.

The past 3 years in college have really been humbling, if anything. I can’t show you neat fiscal/monetary policies that will lift us out of this prolonged recession and 8.5%+ unemployment, and actually, no one can — not even 100 ivy league grads in a conference room. What I can tell you is where we have gone wrong in the past, and it all revolves around really, really bad assumptions. Look out for more posts about poor assumptions. I feel like I need to address those in more detail.

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13 Responses to How My Naïve Perception of the Economics Profession Eventually Changed

  1. davidcjackman May 19, 2012 at 4:18 pm #

    Fantastic post! Looking back to see how you’ve grown and evolved in your knowledge and beliefs can be extremely rewarding and insightful.

    Also, you deserve credit for not allowing yourself to become indoctrinated and remaining critical of what is taken for granted by the “mainstream”.

  2. Thomas A. Trosko May 21, 2012 at 12:36 pm #

    I am very proud of you and your ability to see the disease that is legal plunder. Good luck to you in the future.
    Tom Trosko
    Libertarian High School Teachers on Facebook

  3. ??? May 21, 2012 at 6:27 pm #

    Unfortunately, your perception of the economics perception is still extremely naive. Although your professors did warn you that the models being taught in your intro classes were heavily simplified, you still seem to believe you’ve received a complete understanding of what economists think.

    “Just one example is applying one MPC (marginal propensity to consume) to an entire nation or state or even a city – assuming that on average, people consume 90 cents of every dollar they make is a ridiculous assumption, and that’s one of the tame ones.”

    This is not a thing that is actually done anywhere besides your intro class.

    “Even if we had population parameters instead of sample statistics to use for data analysis, any kind of policy to combat negative economic influences or shocks would instantly be outdated, and that isn’t even considering the amount of time the policy takes to implement. The economy is organic. It is made up of individuals, engaging in trades with one another that make both parties better off. The economy is not a machine, or a country, or a state. Therefore we cannot treat it as such.”

    Sure, but that doesn’t mean that economic situations are changing so rapidly that we can’t use previous states to estimate future ones. For example, the U.S. soda consumption on a given Monday shouldn’t be too different from the consumption on a given Tuesday, controlling for, say, daytime temperature. Of course, as the horizon extends, extrapolation gets tougher, but it’s not impossible.

    “Economists, most of who work directly for the government or state-subsidized institutions, influence economic policy and the consensus among academics. It is in their own interest to push for more government spending or pro-interventionist economic theories that will keep their jobs secure.”

    The problem with this line of thinking is that most economists don’t work on topics that affect their own employment. Even espousing expansionary fiscal policy isn’t necessarily going to benefit an academic–it’s not like the government is increasing the funding for scholarship (in fact, as we just recently saw, Congress voted to remove it, at least for political scientists). Do you genuinely believe that the thousands of academic economists out there are lying about their results for political purposes? Because that is a conspiracy, and Occam’s razor suggests a simpler explanation.

    In addition, not all Keynesian macroeconomists support increases in spending. Mankiw is a perfect example of the opposite.

    “If someone approaches them with a new perspective or a problem with the stuff they have been teaching for 30 years, some professors will take it personally, and others will just shrug it off as undergraduate ignorance.”

    Spoken by someone who’s never taught undergrads. 90% of the “challenges” I received while teaching intro macro were things that economics had long since passed that weren’t reflected in the extremely simple models taught to undergrads.

    I understand that someone like von Mises is appealing to the undergrad who is excited about being able to outsmart their professor. “Everything you’re being taught is wrong!” is an exciting, appealing statement. “You can figure everything in economics out via logic!” is especially tantalizing to an undergrad who lacks the mathematical skills to access modern economic theory. But it’s not a vast conspiracy–von Mises is roundly rejected by the academic mainstream simply because his work (and that of his followers) is methodologically unsound.

  4. [email protected] May 23, 2012 at 2:40 pm #

    I strongly suggest you continue studying economics. Maybe at some point you’ll actually learn some of it.

  5. Harry potter May 25, 2012 at 12:24 am #

    One of your issues is you don’t understand the scientific method. In any model whether it is in the form of statistical model, mathematical or an experiment you always try to isolate the effect of one variable while holding other variables constant when trying determine the effect on the independent variable. Thats why economic models are designed the way they are. If you want to see a model which all parts are moving there is one; its called the real world. The point of the simplification is to from abstract reality to determine the significance of certain exogenous variable on endogenous variables.

    Your exposure to the discipline is quite limited and narrow, but you’ve made at least one astute observation. That economic theory describes before it prescribes.

  6. Ed May 25, 2012 at 5:49 pm #

    This post lacks any context or perspective. You are already the subject of many flame posts: http://www.econjobrumors.com/topic/how-my-naive-perception-of-the-economics-profession-eventually-changed
    You look extremely naive posting it, and you don’t want potential employers name-searching you and finding something so poorly thought out. I suggest that you take this post down.

    • nfreiling May 25, 2012 at 7:04 pm #

      Ed: “Context” and “perspective” are pretty broad words…perhaps you could give some reasons why you think this post “lacks” such qualities?

      Being sympathetic to the Austrian school myself, I am often the object of criticism that goes unjustified and unexplained…which I can only credit to the fact that my beliefs are not mainstream and often misunderstood. Yet when I do ask for reasons as to why critics claim my beliefs are flawed, I often find that they are far more open to many of my ideas than they initially positioned themselves to be.

      • ??? May 26, 2012 at 3:12 am #

        Unjustified and unexplained? Don’t pretend like Austrian beliefs have gone completely uncriticized. Just because you don’t read/understand the criticism doesn’t mean it’s not explained.

        Ed criticizes this author because he fails to display any knowledge whatsoever of what an economist actually does, instead assuming that the simple material taught in his undergrad classes is reflective of what real academic economists are doing. The failure of our pedagogy is a topic for another time, but the author’s failure to attempt to understand modern economics beyond his undergrad experience is even greater. Do you think there’s no reason that the only people who embrace Austrian tenets are those on the fringe of modern economics?

      • asdf May 30, 2012 at 5:24 am #

        There you go: http://econfaculty.gmu.edu/bcaplan/whyaust.htm

  7. N May 26, 2012 at 12:41 am #

    “Economists, most of who work directly for the government or state-subsidized institutions, influence economic policy and the consensus among academics. It is in their own interest to push for more government spending or pro-interventionist economic theories that will keep their jobs secure. As much as this sounds like a conspiracy, it’s not. It’s rational behavior with respect to the incentives of the system. This is why Keynesian economics is still so prominent today. It justifies more spending by the state, which helps politicians get reelected.”

    Your analysis about the incentives in economics makes the mistake of not thinking on the margin. Put yourself in the place of an economist at a state university (or even at most government agencies) who is considering how to allocate his time. Writing a paper, op ed, etc. that promotes increased government spending is very unlikely to affect the amount you earn because the marginal effect it has on policy makers views about spending is virtually zero. However, there are a wide range things you could do with that time that will have an effect on how much you earn or benefit you in other ways. You could do consulting work for a firm, you could try to produce a paper of sufficient quality to be published in a top economics journal, you could read books or papers to learn new skills, you could try to improve the quality of your teaching, you could spend time with your friends, play with your children, etc.

    The only economists who might have some incentive to “push for more government spending” are economists directly employed by politicians in office or seeking office, which are a tiny fraction of the economics profession. (This excludes most economists employed by the government whose work is largely unrelated to advising politicians about spending policy or any kind of policy for that matter). And even their incentive to promote a politician’s agenda is tempered by the fact that they will have to get a job in the economics profession after the poltician leaves office (or loses the election), which will be harder to do if they damage their reputation by saying false things while involved with politics. Of course, economists aren’t unique in this respect. Anyone who works for a politician faces similar incentives.

  8. davidcjackman May 26, 2012 at 3:33 am #

    In light of some of the comments here, perhaps this post should have had a fourth conclusion: something like, “Any naïveté I may have about the economics profession will only become clear in retrospect.”

  9. Smiling Dave June 23, 2012 at 1:43 pm #

    That long post saying you got it all wrong is pretty lame.

    1. F’rinstance, economists will have something better to do than cheerlead for the govt, he says, because there are so many cheerleaders already.

    Now that’s an example of arrested development, writing something like that. Even if we grant they won’t cheerlead, will they ever write something against the govt? What’s his answer to that, the fool.

    2. AE has long been rejected because its methodology is wrong. First of all, tell that to the folks that gave Hayek a Nobel Prize. Second of all, he’s begging the question. The question is who has the right methodology? His answer: the Keynesians, His proof: they reject the other methodolgy, don’t they?

    3.Here’s another ridiculous argument of his: I am so much smarter and better informed than 90% of my undergrads that AE must be wrong, too. I mean, turn on the logic, mate.

    Illegitimi non carborundum.

    • ??? June 23, 2012 at 4:19 pm #

      1. At least read the statement. It’s that they have no reason to illegitimately propose government intervention because they aren’t employed by the government and never will be.

      2. Any past legitimacy of Hayek’s doesn’t imply present legitimacy of anyone upholding the AE ‘tradition.’ The modern economist has access to a much more robust methodology than was available in Hayek’s time. The illegitimacy of Austrian methodology is that it rejects empiricism and thus rejects any test for validity. It’s not invalid because of its conclusions necessarily, it’s invalid because of the way it arrives at those conclusions.

      3. No, I’m just giving you an excuse in the future in case you ever educate yourself further and feel embarrassed about your naivete. I can relate–I was a teenage libertarian, too.

      Oh, and (faux-)Latin phrases aren’t a substitute for intelligent discourse, despite what you may think.

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