The standard (or neo-classical) view of economics makes a lot of assumptions. The main ones are that people have rational preferences, they are self-interested, they are utility maximisers and they have access to all relevant information (including information about the future). The economy is assumed to be in equilibrium, markets are efficient and perfect competition reigns (of course this is a simplification). These assumptions come in for a lot of criticism but they are defended as necessary simplifications. However, the assumptions economists make have a huge effect on the world of economics and therefore world economies. Continue reading “Economists And Their Assumptions”
Even though prices are an essential part of the economy, surprisingly little effort goes into researching them or attempting to understand how they are set. The standard economics textbook gives only the briefest mention to the factors involved in their level. The standard summary is that prices are set in response to demand and supply. However, lately I’ve been thinking that this doesn’t quite make sense. The price of ice cream is the same in winter (a time of exceptionally low demand) as in summer (a time of exceptionally high demand). Pubs and restaurants usually charge the same prices during the day and mid-week (when they’re quiet) as during the night and on weekends (when they’re packed). In fact they seem to follow a policy of rationing space rather than allowing the price mechanism to adjust and convey information.
My epiphany came to me as I was wedged at the bar where I had been waiting for half an hour trying to order a drink during Black Monday. Why didn’t the student bar just raise its prices to deal with the excess demand which they knew would occur (as it did every year)? Why did they opt for an option that any first year economics student is taught is highly inefficient? Continue reading “Where Does The Price Come From?”
Economics is not a homogenous or unified subject, rather there are a series of competing ideas over the key areas. These ideas can be roughly divided into several schools of thought and I’ll give a guide to them here. It is the great myth that economists pretend to be non-partisan when in reality we all have our own biases and opinions. It is impossible to study a topic without forming an opinion of it and economists are no exception. So by understanding the different schools of thought you can not only understand why economists give different and contradicting policy advice but also how they see through different lenses. Continue reading “Guide To The Economic Schools Of Thought”
Advertising is a hugely influential part of society and business yet it is never mentioned in traditional economics. In neo-classical economics, firms do not advertise. This is not a trivial omission because advertising has an enormous effect on the market. Roughly $500 billion dollars was spent on advertising in 2011. Nor is its omission a simple mistake. Rather it is deliberate because once you examine advertising, you see what an enormous distorter of the market it is. Continue reading “Economics Of Advertising”
One of the most glaring omissions from modern economics is the complete absence of any mention of power. Textbooks describe a world where everyone is equal and no one has power to influence others to benefit themselves. Norbert Haring and Niall Douglas make a huge contribution to correcting this omission by discussing the importance of power relations in economics and during the financial crash in their brilliant book, Economists And The Powerful. They show how power got removed from the economics discourse for ideological reasons, the power and influence of the financial industry, the corporate elite, how the economy is best described as monopolistic competition, how the money supply is controlled by banks, how the labour force is shaped by market power and how the government is manipulated by corporate interests for their own gain. It is a superb book that I highly recommend.
There are few debates that economists take only one side in and trade is one of them. Textbooks argue that trade creates prosperity always and everywhere. Students are required to answer questions on the benefits of trade and the costs of protectionism. There is a strong attempt to give the impression that all economists support free trade and the debate is only between those who understand economics and those who don’t. What is strange about all of this is how shaky the foundations for this belief are. It is mostly reliant on the “Law” of Comparative Advantage, which as I shall discuss, has some very significant flaws. Continue reading “Challenging Economics – Theory Of Comparative Advantage”
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.
Whenever there is a great debate over wages, be it the minimum wage or unions effect on wages, opponents cite the marginal productivity of labour. They argue that this prevents businesses from paying higher wages and if they did, it would only lead to higher unemployment. This theory is unquestionably stated as fact in all textbooks and the impression is given that there is an iron law of economics that fixes wages. Despite its wide use, it is completely false. The vast majority of workers do not have a marginal productivity of labour and those that do are not paid it. It is a theory that has long outlived its day and continuing adherence to it means the wrong decisions are being made. Continue reading “Challenging Economics – Marginal Productivity Of Labour”
If were to ask a 1st year economics student what the first and most important idea of economics, they would probably mention equilibrium. Neo-classical economics is based upon the theory that the economy is in equilibrium. This literally means balance or stability, but is usually expanded to mean not just any balance between supply and demand, but that there is only one and it is the optimal position for the economy. From this comes most neo-classical arguments about the economy, in particular the idea that the government only distorts the market and any intervention is necessarily inefficient. But is it actually true? Does the economy ever reach equilibrium? Continue reading “Do We Ever Reach Equilibrium?”
One of the fundamental problems with neo-classical economics is its lack of reality. In university students are taught theories that bare little similarity with the real world. I have learned a lot about economics and society during my time in university, unfortunately very little of that happened in the classroom. So I will run a series of posts where I challenge mainstream economics and debunk the unrealistic theories. Myself and my classmates are well able to explain abstract theories but can say little about the state of the economy or what to do about the recession. First up is the Coase Theorem, a particularly ridiculous theory that only an economist could take seriously. Continue reading “Challenging Economics – Coase Theorem”