Econ Majors Graduate With a Huge Knowledge Gap

(Bloomberg View) -- Economics remains one of the most popular majors for college students. Most econ students, of course, don’t go on to become professional economists; instead, they fill the ranks of the U.S.’s vast upper-middle-class of business managers and professionals. The models they learn in their college classes inform the way they think about the world, even if they don’t end up using them for quantitative purposes after final exams are over.

But there’s at least one gaping hole in the education most econ majors receive. They learn plenty of models, but they aren’t often taught to think critically about what they learn. At best, they absorb a few ideas from offhand comments by their professors, or from the tone of their textbooks. As a result, many of them leave class with deep reservations over whether economics theories represent real science, or whether economists approach the world in a moral, socially responsible manner.

This problem can be addressed by making all U.S. econ majors take a philosophy-of-economics course, like the one offered at the London School of Economics. There would be two main parts of the course -- epistemology and ethics.

Epistemology concerns the methods economists use to understand the world, and whether these are valid. That’s often a very tricky question. To just illustrate one example, take supply and demand -- the basic model of markets taught in most introductory econ classes. In this model, you draw two curves -- the demand curve, representing how much buyers would be willing and able to buy at a certain price, and the supply curve representing how much sellers would be willing and able to sell:

It looks very simple, but looks can be deceiving. The lines on the graph are totally hypothetical! We can’t actually observe how much people would buy and sell at hypothetical prices. All we can see is how much people do buy and sell in the real world. According to the theory, that’s the point where the supply and demand curves meet. That’s very little information.

As a result, in order to have any idea what supply and demand curves actually look like, you need to bring in lots of additional assumptions -- for example, that the price changes you observe were due only to shifts in demand or to shifts in supply. Economist Paul Romer pointed this out rather acerbically in an essay entitled “The Trouble With Macroeconomics.”

Even more importantly, there’s no guarantee that the supply-and-demand model is a good description of how a particular market actually works. In the labor market, there’s plenty of evidence to indicate that supply-and-demand, however intuitively compelling, is wrong. A better model might be monopsony, in which one or a few large employers have unusual power to set workers’ wages, or general equilibrium, which takes into account that workers spend their wages on things produced by other workers, or even search models, which account for the difficulty of deciding where to work.

These questions aren’t just academic curiosities -- they’re central to policies that affect the livelihoods of millions of people, in the same way that minimum wage floors, immigration, rent control and tariffs do. Huge numbers of American economics majors are graduating from college believing in models whose validity and practical usefulness they haven’t been forced to think about deeply. Taking a class on economic epistemology would help prevent tomorrow’s leaders from making or supporting policy based on flawed intuition and unreliable evidence.

In addition to the question of how we know when econ models are right, people need to think about the morality of how those models get used. This is where ethical philosophy comes in.

Suppose economists find that a $15 minimum wage raises the incomes of 99 percent of low-paid workers, but throws the other 1 percent out of jobs and onto the welfare rolls. Is it worth it? Should the government obey the principle used by doctors -- first, do no harm -- and avoid any policy that hurts anyone in any way? Or should the government take responsibility for any outcome, based on the idea that government sets up markets in the first place?

More generally, there’s the question of basic values. A very thorny topic is the question of the social welfare function, or how policy makers decide what’s good for society. Should they treat everyone’s economic well-being equally, or focus on the poorest people? Should they adopt a nationalist stance and worry only about the welfare of citizens, or care about people living in other countries? Are some government restrictions of economic activity unjust, even if they would lead to everyone being richer? And if people make decisions that result in their own unhappiness, should the government stop them from doing what they want?

Economics students rarely learn to think about such crucial issues in any systematic way. This causes many to be deeply uneasy about the morality of what they just learned, and to distrust the economics profession. There’s also a chance it might cause others to emerge from their classes as more selfish individuals. And it certainly doesn’t help voters, policy makers and businesspeople think about policy in an enlightened manner.

A mandatory philosophy-of-economics class wouldn’t make these thorny epistemological and ethical issues go away, but it would improve American educated elites’ ability to see nuance -- something that’s too often missing from our national discourse.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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