What Economics Doesn’t Talk About

Whenever I tell people that I’m studying economics they usually ask me how to solve the recession or what to do about the banks. Each time I’m embarrassed over the fact that we have never even mentioned these issues in lectures. In my course I have basically been taught that the free market is the most efficient and best system in the world and trouble always results when it is interfered with. In my textbooks recessions are not mentioned, they do not happen. There is no explanation of unemployment, the biggest issue of our times. There is no mention of profit, the heart of capitalism. Nor do they talk about banks or money or advertising or how systems are guided by power relations. No mention is made of poverty, in effect ignoring three-quarters of the world.

Economics didn’t see the recession coming because in their world, recessions don’t happen. The free market is always right. The idea that the market could fail is never given a moment’s thought. The market is always assumed to be in equilibrium, providing the greatest good for the greatest number of people. If you thought the current crisis would have changed this thinking then you would be wrong. The older pre-recession editions of textbooks are essentially the same as the newer post-recession textbooks. Mainstream economics has cut itself off from the real world and instead built a fantasy utopia.

Unemployment is a thought never far from mine or my generations mind. It is the biggest problem affecting millions of people the world over, yet traditional economics offers no explanation of it. I will graduate with a degree in economics in six months time, yet I couldn’t tell you why some people are unemployed. It is the elephant in every economics lecture. It is assumed that everyone who wants a job gets one and works as much as they want. This is a serious problem because these same people who do not acknowledge the existence of involuntary unemployment are the same people who will be asked to come up with a solution.

The central driver of capitalism is profit, which is why it is daft that profit is never mentioned. Normal companies are assumed not to make any profit. It is only monopolises or other market distortions that allow profit to exist. This is jaw dropping madness. It’s like an economist stepped through the looking glass and into wonderland and described what he saw. Trying to describe economies without profits is like trying to explain nights out without alcohol; you’re missing the central point. (Technically textbooks assume profits equal opportunity cost rather than zero. By this they mean, if you quit a job that paid 10,000 a year and set up a business, you will only make 10,000. This absurdity is accepted as conventional wisdom in discussions of firms in the market.)

Economics is all about money or so you would think. Actually economics assumes there is no money in the economy. That’s right; the people who are supposed to save us from the crisis think we live in a barter economy. You can’t make this stuff up. If money isn’t mentioned then neither is banking or debt. Many economic models don’t include banks in them. Now do you know why economists neither saw the crash coming nor have any idea how to get us out of this one? Mainstream economists are at a loss to explain what to do about the banking crash or even to explain how it happened. Pull up a chair at the Mad Hatters tea party.

There is no talk of power. Instead we are all assumed to be equal. The boss and janitor are two equal individuals who reach a fair and balanced contract between themselves. The idea that one could have power over the other is not considered. If you ignore power relations how can you understand Mr. Burns and Smithers, or Dilbert cartoons, which are funny because they’re true.  Wal-Mart, Apple, Microsoft and Exxon are just firms like any other, the fact they dominate their industries is ignored. Our lives are governed by power relations but this is removed from textbooks. Rather economic dwells in the fiction of equal individuals bargaining fairly. Without discussing power you cannot understand the role of government, big business, the 1%, the media, big labour or interest groups or their impact on society. Which is bad because they basically run society.

Economics treats the economy as though it is full of rational logical individuals each coming to independent decisions and conclusions. It does not mention the massive advertising industry who existence is contrary to this. Advertising is all about manipulating people to buy products by playing on thoughts and feelings, subliminal or otherwise. Advertising is all about convincing people to buy something they weren’t going to buy. Its aim is to push the market away from the natural equilibrium of perfect competition. It creates brand loyalty where consumers buy products even if they’re not the best price or quality. It adds to the herd mentality and the importance of fashion. Failing to recognise advertising leaves economists at a loss to explain why the market never reaches equilibrium.

Economics does not talk about poverty or even try to guess why people are poor. Open a textbook and you find a world where everyone has enough. It would almost seem rude to ask why are their poor people in the world. In doing so, economics ignores three-quarters of the world and instead retreats to a narrow corner. Instead of grappling with the major problems facing the world, orthodox economics dances with faeries of utility, equilibrium, surplus and efficiency.

Economics does not talk about fight club.

I study economics because I want to explain (and hopefully solve) the problems facing the world. I disagree with Marxists but at least they are asking the right questions, even if their answers are wrong. Why are some people rich and others poor? Why are we stuck in recession and Europe on the brink of collapse? Why is it that so many people cannot find work no matter how hard they search? What are we supposed to do about the banks? Why are factories lying empty, workers lying for idle and people without the necessities of life? How do the power elite run society? Economics does not talk about these issues and instead risks relegating itself to irrelevance.

20 thoughts on “What Economics Doesn’t Talk About”

  1. I heard that the logic of conventional economic theory would mean that every consumer, if playing a game of chess, would calculate each of the 12 trillion potential moves before playing. I don’t know of that’s true, but the fact that it can be claimed speaks volumes.

    To often economics becomes a means unto itself, with the public’s ultimate quality of life, and many other factors, almost completely forgotten. All the more reason to learn the science with a more holistic approach mind.

    1. I haven’t heard it applied to chess, but yes it would be assumed that the consumer would make the best choice in every circumstance (daft I know).

      I agree that economics often misses the point and try to use my blog to point this out

  2. Modern mainstream economics has several huge holes missing from its theories, as you so eloquently point out.

    One of the key building blocks of any economic framework, in my opinion, is subjectivism. It should be recognised at the outset that economic value is something which can only exist in the minds of individuals, since there is no “collective brain”. We see at once that Individuals are trapped by their own personal limitations and driven forward only by the goals which they personally perceive as worthy of attaining (even if those goals are altruistic and if they seek cooperation with others in order to achieve them).

    As you describe, the mistake of the mainstream is that they tend to model individuals as having extremely good or perfect information about economic conditions, and having extremely good or perfect strategies to achieve their goals in the context of that information. I tend to think that the assumptions which allow for the most impressive mathematical models to be designed are the ones which are used, while humbler and more truthful but awkward assumptions are not.

    Once we have subjectivism taken care of, we can move on to another critical concept: marginal utility. Marginal utility combines powerfully with subjectivism to tell us that the value of a good is not intrinsic to its nature or to any objective properties whatsoever, but is only relevant in the context of the desires of an individual and of what marginal use that individual would make of that good if (s)he gained an additional unit of its supply.

    Take an extremely rare painting by an obscure artist as an example, and suppose that only two people in the world care about it at all. One of them is willing to pay up to £10,000,000 to get one copy of it, the other is willing to pay up to £9,999,999 to get one copy, and nobody else would pay anything for it at all. In an auction between the entire human population for this painting, the person who would pay up to £10,000,000 to receive it must in fact do that to win. This is the economically optimal outcome, since the opportunity cost of the win is that the other person who also wanted it does not get to receive it. In this way we see that opportunity costs are what define prices, and that opportunity costs are driven by the marginal utility of an additional unit of supply. Note: if an additional copy of the painting was discovered unexpectedly and went up for auction, the person who came second in the first auction would then be able to buy it for £1. Once we understand this, we understand the power of the concept of marginal utility.

    After we have these basics covered, I think we then need capital theory and monetary theory with similarly solid foundations. Sound economics does exist, but you have to dig around for it.

    1. I agree that the assumption of perfect information is unrealistic. I wouldn’t know enough philosophy to comment on subjectivism. I am well aware of marginal theory, its point that is continually hammered at. While I agree it is important, I feel its value has been overstated. For example, it ignores the power of economies of scale.

  3. I very much appreciate the perspective of this post, and GM’s comment.

    I take slight issue with the idea that mainstream economics is completely in a fantasy world. Behavioral economics has grown very quickly in importance, and is incorporated actively into the Obama administration’s policy decisions. People like Paul Krugman are very concerned about unemployment and real-world consequences. I don’t know what is taught in your classes, but I think practicing economists may have a broader and more diverse perspective.

    That said, your basic point holds: why does basic economic theory start with strange and untenable assumptions? As GM points out, why don’t we consider value as more than currency? I think most (or all) economists have failed to understand the big picture. Fully considering marginal utility and value would completely change the discussion of socialism versus capitalism. I discussed this in a previous post in some detail:


    Another important thing missing from standard economic theory (and perhaps unknown) is the relative effects of efficiency versus flow. Many of us believe instinctively in frugality and efficiency – we shouldn’t waste money on paying people to do useless things, and the economy will improve if we streamline. At the same time, Keynes famously referred to paying people to dig holes and fill them in again as a way to increase employment and thus increase the flow of money in the economy, spurring growth. Obviously these two ideas are contradictory, and obviously neither is right in the extreme.

    Empirically, we perhaps have some insight into when stimulus (=flow) is good and when austerity (~efficiency) is good, but I don’t think anyone really understands why, or how these two contradictory processes interact to shape value at the societal level.

    1. I completely agree that Behavioural economics provides great insights, but it is definitely outside the mainstream. In fact you could say it is basically a critique of mainstream economics as taught in textbooks. Paul Krugman (who I am a big fan of) could also be seen as an outsider.

      It is interesting to compare the difference between efficiency and flow, as you put it. (A topic I touched on in my last post, “Built To Break”).

      PS your post on money makes a good point and its funny that something so important gets so little attention.

    2. Keynes invented new terminology for fallacies which had already been devastated by classical economists in the 19th century. He had no theory of capital, which is why digging holes and filling them up again seemed like it could achieve something. Abandoning Keynesian fallacies is a great thing, because you are then free to say that digging holes and filling them back up again is completely wasteful, and that hurricanes and wars are bad for society.

      1. Keynes did think that, he just had a way of saying ridiculous or sensationalist things to emphasise his point. His passage on the hole digging (you’d know this if you actually read him rather than reading a few Mises.org articles) suggested that it would be a last resort.

      2. Hey Mate, You likely also know that GDP—with an emphasis on the “G”—does not account for useful life and depreciation—aside from ignoring human factors. This means, when a hurrican levels a city and it is rebuilt, the value is double counted—once for the no linger extant city and again for the new one. In the US, the infractructure has a substantial “technical” debt—perhaps in the order of a trillion dollars—, but since we don’t calulate NDP, it is unrealised. Even repair of existing infrastructure adds to GDP instead of just raising it to pre-depreciated levels.

        To add to Robert’s point, his hole filling was not a first resort, and is meant as a comment to highlight multiplier effects.

  4. GM – I am not an economist, and unable to respond intelligently to a critique of Keynes based on a failure to understand capital – I’ll take your word for it.

    Nonetheless, even if his argument doesn’t work in the extreme (and from my limited knowledge I would tend to agree), I am more interested in understanding why stimulus is sometimes good and why austerity is sometimes good (or why economists don’t seem to be able to agree on something so fundamental).

    Paying people to dig holes and fill them in again is essentially a form of redistribution from rich to poor. Given the changing value of the dollar for people of different incomes (as argued in the link above), the value to society of hole-digging would not have to be all that great for there to be a net benefit to society of such a policy, but such a benefit would depend on how the taxes implied affected overall economic conditions.

    I think what economics seems to be missing (and feel free to point me somewhere if I am wrong) is a comprehensive theory that explains this balance between (a) how value is created by efficiency, (b) how value is created by redistribution; and (c) how growth is slowed by redistribution, in turn affecting value.

  5. As an economics instructor, I got a copy of Paul Krugman’s undergrad textbook. I am a big fan of Krugman, Stiglitz, and that lot, but I was very disappointed how much mainstream corporate economics Krugman was pushing—countering what he talks about in public. Too much to discuss here.

    An economic book you might appreciate is The Economics Anti-Textbook by Rod Hill and Anthony Myatt:

    Canada: http://www.amazon.ca/The-Economics-Anti-Textbook-Critical-Microeconomics/dp/1842779397.

    UK: http://www.amazon.co.uk/The-Economics-Anti-Textbook-Critical-Microeconomics/dp/1842779397

    US: http://www.amazon.com/The-Economics-Anti-Textbook-Critical-Microeconomics/dp/1842779397

    Definitely worth a read. They start each chapter with an accepted mainstream theory and poke holes in it. A Kindle version is also available at a lower cost.

    1. Krugman as an academic is a lot less impressive than Krugman as a commentator, which is quite disappointing. I have heard of the Economics Anti-Textbook before and I would really like to read it, so I’ll keep an eye out for it.

  6. Robert
    If I was your age, with your stated views, & looking for a career in economics that might actually improve humanity’s lot, I would be looking to doing a post grad with the Post Keynesian school, MMT. You will find most of what you noticed excluded in the mainstream discourse dealt with there.
    University of Missouri Kansas City is the centre of things, academically, Randall Wray & colleagues, along with Bill Mitchell in Australia. Wray & Mitchell are nearing completion of a new texbook – Modern Money – which provides a correct operational understanding of (fiat) monetary systems & the macro analysis that flows from that. Bill’s career focus has always been labour/unemployment & is a prolific blogger.
    Steve Keen is quite interesting too, aiming to develop macro models that are truly dynamically based & include banking, money & debt (that which the world’s pre-eminent models excluded as irrelevant!).
    Ireland’s prominent economists are really quite pathetic & not worth bothering with.
    Good luck with it. God knows your generation will need it.

    1. Thanks for the advice. It sounds like a good idea, but I don’t think I’ll be able to travel abroad for further study and will have to stay in Ireland. Unfortunately while there are some Irish economists who are good at discussing Irish issues, there aren’t really any who deal with global theory. I am actually a big fan of Steve Keen and loved his book, Debunking Economics. I do intend to do further research and hopefully change the way we view economics so I’ll see how it goes.

      1. Hi Robert,
        Yes, I agree re the Irish economists, but considering we are members of a deeply flawed, by design, EMU, their performance is lamentable imo. Nor do they seem to have taken any notice of such impending issues like peak oil. IMF chief researcher Michael Kumhof is pretty harrowing in his own recent report.
        Kumhof also features (describing exactly MMT’s understanding of banking/money) in a recent Swedish TV docu on economics & the crisis. Keen & Dirk Bezemer also feature. Well worth a view. It also supports Michael Hudson’s political economy views on the rise of the ‘financialised economy’. Hudson has it right imo. The docu is on youtube with English subs:

        David Malone’s blog is very good too on the shenanigans of the banksters:
        William Black (UMKC) & Matt Taibi (Rolling Stone) have written a lot about banking control fraud.
        All of which one would be blissfully unaware of if it depended on Ireland’s economists or media.

  7. Great post. Should be read by all economists! And I second Mike Hall’s suggestion above. I got my degree in Econ many years ago and never understood why all those important things were left out. About 2 years ago I found the MMT bloggers and academics and so much finally made sense. Best of luck to you.

  8. “Unemployment is a thought never far from mine or my generations mind. It is the biggest problem affecting millions of people the world over, yet traditional economics offers no explanation of it.”

    I remembered that powerful line you wrote, when I got to the end of a year-old article by Paul Davidson at Naked Capitalism:


    If you’ve not read Davidson’s article, I recommend it.

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