I decided to study economics because I wanted to change the world. I wanted to improve people’s lives, particularly the poor and powerless. I wanted to find solutions to the present crisis so that the scourge of mass unemployment no longer haunts us. What I got instead was completely different. My economics textbooks did not deal with important issues like unemployment, recessions and debt. In fact, they barely mentioned them. Instead they are filled with nonsense that has more to do with pushing a free market ideology than describing how the world really works. The Economics Anti-Textbook brilliantly takes apart the mainstream textbooks and their flawed arguments. It clearly and concisely debunks the mainstream myths contained in microeconomics textbooks. It is one of the best economics book I have ever read and essential for any economics student.
What is most impressive about Anti-Textbook is how readable it is. Textbooks are usually dull affairs and a critique of one doesn’t sound great, but it is actually really interesting. Each chapter begins with the standard mainstream neo-classical argument. It then takes these arguments apart piece by piece. The chapters are broken into manageable sections; each ending with an info box entitled “Questions For Your Professor”. This is the best part of the book as it gives an example of the type of thoughts I’ve had in many lectures but been too afraid to ask. They almost effortlessly poke holes in the mainstream theory.
The authors demonstrate that textbooks are not the neutral dispensers of facts that they like to pretend, but just as ideologically driven as anyone else. In fact we all have our ideologies and biases so the authors of textbooks are no exceptions. They display this bias as much in what they say as what they don’t. The ignoring of power relations, the downplaying of externalities, the lack of supporting evidence for perfect competition and the assumption that people are rational actors, are ideologically charged treatments which help explain why the strongest supporters of the free market are among commerce and economics students.
It takes apart the textbook argument piece by piece. It argues that the traditional focus on scarcity in economics is misplaced in a recession when there is a large surplus of people willing to work and factories lying empty. It shows that the traditional divide between efficiency and equity is a false dichotomy and many countries have both. They explain that people are not rational, a fact long known to advertisers. Behavioural economics fundamentally changes how we view economics, yet it is given scant attention in mainstream textbooks. They show that econometric models are not only completely unrealistic; they also lack predictive power that their proponents claim but never prove. They show that many theories are designed so that they cannot be falsified so that even after the financial crash, there are still people supporting the efficient market hypothesis and rational expectations.
They show that much of the textbook neo-classical theory relies on the assumption that consumers have perfect information. By perfect information, they mean people know everything they need to know. If they do not (which of course no one does) then the free market will not be efficient. If there is even a slight cost of finding out information about products, then the market will be distorted. The world is full of imperfect information, sellers know more about their product then buyers, people know more about their health than insurance companies, potential employees know more about their CV than potential employers and a car salesperson knows more about the car than a buyer does. If people do not have perfect information then the economy can exist in a state of disequilibrium or even multiple equilibria.
Perfect competition relies on the assumption that all businesses are price takers and have no control over prices. Hill & Myatt ask the obvious question that is if businesses don’t set prices, then who does? Unlike textbooks, they actually study how businesses set their prices and find that they do so mostly on an annual basis. This means prices are sticky and not changing in response to every change in demand, making it hard to argue that firms are in equilibrium. They illustrate that contrary to textbooks, not all goods are the same (homogenous), and in fact every business tries to differentiate it from its rivals. They deliberatively try to make it hard for consumers to compare them with their competitors. In this way, oligopoly or imperfect competition describes the market far better than perfect competition does. Perfect competition is usually defended by the claim that while it does not reflect reality, it is a good and simple starting point. However, the same thing can be said for monopoly, which is simpler still and just as rare. In reality the market is really a mix of competition and monopoly.
What I particularly liked was the attention the authors paid to power relations. They rightly point out that it doesn’t make sense to think of the world as comprising individuals and tiny businesses. This view ignores the power of corporations, institutions that dominate the economy. The reason minimum wages don’t increase unemployment is that firms have market power and can use it to keep wages low. Unlike textbooks Hill & Myatt know that firms have power not only over the market, but that power relations exist within the firm. How else can CEOs pay themselves such exorbitant pay? A major example of power is the effect businesses have on politicians. They use their power to ensure laws favourable to them are passed and unfavourable ones are removed. Lobbyists ensure they receive tax breaks and that their profits are not challenged by taxes regulation or state enterprise.
Hill & Myatt give an interesting discussion on co-operatives and workplace democracy. We all agree about the benefits of democracy in politics, but why are our workplaces (where we spend so much of our time) so authoritarian? We would not accept it if only a small elite handful ran the country so why should we accept it if they run the workplace? Is it unreasonable that people have as much say over how they work as they do over how they live? Studies have found that co-operatives benefit from higher productivity and increased staff morale and the Mondragon Co-operative is a global success.
Economic textbooks place a great emphasis on preferences, yet they do not say where these preferences come from. They ignore the possibility that firms could use advertising to manipulate these preferences. After all, the whole point of advertising is to convince people to buy things they wouldn’t have otherwise bought. Textbooks assume that there are no bad deals on the market, if something sells, it’s because people want it at that price. But Hill & Myatt imagine if a new phone comes out and you think it’s a waste of money. However, there is a slick advertising campaign run and all your friends get it. You change your mind and buy the phone, which you think is pretty cool. How do preferences fit into this? Did you waste your money or buy a cool phone? How can we measure consumer welfare and compare preferences if they are changed by advertising? To quote Galbraith: “One cannot defend production as satisfying wants if that production creates the wants.”
Textbooks assume that more is better. They are based on the idea that having more goods is better and makes us happier. However, the evidence suggests otherwise. Studies find little or no difference in population happiness between rich and poor countries and America has had stable levels of happiness since the 50s despite enormous growth in wealth since then. This is because what really counts is relative gains. People do not live in isolation, they compare themselves to others. So if you gain while everyone else does, then relatively things have stayed the same. This is why collective action can be beneficial even if it is restrictive. Imagine you start to work late in order to get a promotion. Soon your colleagues will have to do the same, pushing you to work later to get that extra edge. This arms race style escalation leaves everyone working later without anyone increasing their chance of promotion. A government regulation on hours would actually help the situation by assuring employees they could work less without losing their relative position. By only focusing on absolute gains, economic textbooks miss a crucial point.
Hill & Myatt describe the textbook treatment of a firm as a “strange thing, sketched out with thought experiments and invented data”. This is a quirk I noticed myself; my textbooks use few if any evidence from the real world. It is all hypothetical examples about how things could happen; at no point does it occur to ask if this is how the world really works. All firms are assumed to have diminishing returns to scale, yet when actual businesses in the real world were asked about their costs, almost half said they had constant returns to scale and the other half said they had increasing returns. That textbooks do not address economies of scale, a factor that is crucial to understanding the economy, is a glaring omission.
Externalities are a major issue that affect almost every part of the economy, yet they are inadequately discussed in textbooks. Hill & Myatt call this the ‘note and forget’ approach. Externalities are mentioned briefly and then ignored when discussing the economy before re-appearing in a chapter at the back of the book, by which time the student has spent months learning about how great the invisible hand is. Global warming (probably the greatest challenge of the 21st century) is quietly brushed under the carpet. The fact that someone could benefit and push the costs onto others (threatening the free market’s claim to maximum efficiency) is only briefly referred to giving students the impression it’s not important.
I could go on and I have only described the first half of the book, but this post is getting too long. Let me wrap up by saying how incredible The Economics Anti-Textbook is. It should mandatory reading for any economics student who wants an accurate view of the economy and needs an antidote to the mainstream textbooks. It debunks textbooks in a comprehensive and entertaining way. It lives up to its title of countering the myths of the textbooks, I and my classmates have had to endure. It is an interesting and inspiring read that I cannot recommend highly enough.