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.