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We Must Teach College Students Basic Economics

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We Must Teach College Students Basic Economics

October 16, 2018

By some measures, this seems like a great time for the field of economics. Economists are hired at universities, in government, and increasingly in businesses, including at leading tech firms. We are well paid. Economists generally recommend little regulation, reduced taxes, and free trade, and the current administration has adopted two and a half of these policies, with substantial economic success.

And yet, we economists have failed in a very basic regard. We are not educating students about the merits of a capitalist free market system, and we are not educating them about the costs of a socialist system. Thus, students lack basic economic literacy. This is important in a democracy because students become voters and politicians, and they do not understand the basic system they are controlling.

By some measures, this is a great time for the field. And yet, economists have failed in a very basic regard.

Economists disagree on the optimal role of government in society. But virtually all mainstream economists agree that a socialist system, where government controls the means of production in most important segments of the economy, is vastly less efficient than a capitalist economy. 

If theory were not enough to teach this lesson, we continually have real world examples, with Venezuela being the most recent. Although Venezuela has large petroleum supplies and was once the richest country in Latin America, socialist policies have reduced it to abject poverty. Food is in such short supply that people are eating zoo animals. Professional women are turning to prostitution to earn money. Seven percent of the population—2.3 million people—have left the country, and more are leaving every day. Similar economic dislocations caused the fall of the Soviet Union, which continually suffered from food shortages.

Despite the obvious and well-document failings of socialism, many Americans support it as an economic system. A recent poll found that 57% of Democrats prefer socialism to capitalism. In a recent election, an avowed socialist, Alexandria Ocasio-Cortez, won her primary for a seat in Congress, and Bernie Sanders, a socialist, came close to winning the Democratic nomination for President.

Some of the most fervent supporters of socialism are college students—and at most universities, capitalism is a dirty word. The young people supporting socialism are our students, and we should teach them the problems with this fashionable but flawed economic system. But most students do not take economics, and those who do take an introductory economics class may not receive such an education.

There are many reasons for this. Economists respond to incentives, and the incentive system for economists puts little weight on teaching the benefits of capitalism. Most economists, like most academics, advance their careers by publishing articles in increasingly technical and mathematical professional journals. An important result of this is that the classes we teach are becoming increasingly technical and specialized, requiring high-level mathematics. This has the effect of reducing undergraduate demand for the economics major.

It is even worse at the graduate level. I am asked once or twice a year by students who support free markets but lack math skills what to study in graduate school, and I must tell these students that without a good bit of math, it is impossible to get a Ph.D. in economics. 

I am not opposed to rigor in economics research and in policy advising. But it would be possible to teach undergraduate economics with a lower level of math. Very few of our students go on to become Ph.D. economists; most go to business or law schools, or directly to the job market. But we teach as if we are teaching future economics professors.

Ordinary citizens need a basic knowledge of economics in order to vote rationally: What will be the consequences of a tax cut or increase? What is the effect of international trade on the economy? What are the costs and benefits of occupational licensing laws?

Ordinary citizens need a basic knowledge of economics in order to vote rationally.

There are a few basic economic principles that are non-intuitive but do not require technical skills to understand. If these were more widely understood, then markets would be viewed more favorably, and socialism would lose its appeal. A very important distinction is the difference between the size of the pie—the amount of goods and services produced—and the division of the pie: who gets how much. Economics focuses on the size of the pie—how can society’s scarce resources be used to produce the most efficient bundle of goods and services.

Voters often focus on the division of the pie—who gets how much? This is because untrained people often view the world as zero-sum. Indeed, zero-sum thinking is probably the cause of most errors in economic thinking, including a belief in socialism. Economies can grow, and it is possible for the rich to get richer at the same time that the poor get richer. The common homily, “The rich get richer and the poor get poorer” is neither certain nor sure; it is totally contrary to fact in a growing market economy

The most basic premise of economics is that hundreds of millions of people can interact with each other with no central direction and no coordination, and yet can reach a consistent outcome which itself has certain efficient properties. This is Adam Smith’s famous “invisible hand.” Because this is not widely understood, there are frequent calls for central direction and central planning, despite its massive failure in the Soviet Union, Venezuela, and wherever else it has been tried. 

Economists also understand that selfish behavior can nonetheless lead to desirable outcomes. The uncoordinated behavior can be motivated by selfish ends, and yet the outcome will generally be efficient. Motives do not matter; outcomes do. In some sense, we are all out to maximize our incomes but the way to do this in a market economy is to provide something that others want to buy. Steve Jobs and Bill Gates became fantastically wealthy by creating the computer revolution, and their financial wealth was only a small part of the massive social wealth they created. In a socialist economy, the way to gain wealth is to gain power over others.

If we economists would make the effort to teach these points to as many students as possible, we could reduce the demand by voters for a socialistic economy. Perhaps donors or foundations supporting free markets could create a system of prizes for economists who advance the understanding of markets for ordinary citizens. This could reorder incentives and lead to more and better teaching.

Paul H. Rubin is Dobbs Professor of Economics at Emory University and past president of the Southern Economic Association. He held several senior positions in the Reagan Administration.

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