So, how’s the state of your Econ 101? I’m talking about those fundamental economic assumptions you took on board way back when, which are probably so comfortably settled in that you don’t notice them much any more.
If you got them from economics textbooks, they might be just a tad dated – by the odd century or two. Is that a bad thing? It depends on what kind of economist you want to be. Take this little quiz to find out.
If you are wondering which option to go for (it’s the 1860s theory of William Stanley Jevons vs. the 1950s onwards theories of Herbert Simon, Daniel Kahneman and others), here’s some good reading around the question:
Herbert Simon on bounded rationality, such as in his 1957 book Models of Man – or for something a bit more recent check out this paper which shows what happens when you put the ideas of Simon, Kahneman and Amos Tversky together.
Also a good read on human values: Amartya Sen’s 1987 lectures On Ethics and Economics, making an impressive bid to rescue Adam Smith from being parodied by history as saying we are motivated only by self-interest. (And Michael Sandel’s What Money Can’t Buy adds the modern question of what happens when we put money motivation where our morals once were…)
And if you like live action, well you still can’t beat Dancing Man for illustrating just how socially influenced we are.
For a thorough slicing up of Marshall’s 1890’s scissors (the intersection of Supply and Demand curves – setting price where they cross), check out Steve Keen’s 2011 very detailed (and very funny) book Debunking Economics – and to see how he gets from scissors to noodles, read Chapters 3-4.
What’s more, Keen sets out in detail how some smart economists spotted a flaw at the heart of equilibrium theory in the 1970s (known as the Sonnenschein-Mantel-Debreu theorum – there’s nothing like a snappy name…), but the implications were so devastating that the economists simply kept it quiet, dropped it from the textbooks, and kept going.
Here’s a choice based on what you think is the fundamental flow of the economy.
Is it the Circular Flow of Goods and Income, iconically drawn by Paul Samuelson in his 1948 classic textbook Economics – and repeated by others ever since – resembling a set of perpetual water pipes running in a loop between households and firms?
Or – as Nicholas Georgescu-Roegen wrote in 1971 (based on the second law of thermodynamics) – is the fundamental flow actually energy and matter flowing from low entropy (like useful fuel) to high entropy (like dissipated heat), looking something like a one-way hourglass ?
First, for a read up on this debate, there’s a wonderful (but hard to come by) history by Heinz Arndt (1978) The rise and fall of economic growth which highlights just how recent is the belief in eternal exponential GDP growth.
The arguments between unlimited growth and limits to growth have compelling advocates on both sides, as I have blogged about earlier.
So, let’s go for some bonus questions.
If you opt for a): what is so different about GDP growth that allows it to defy nature and grow forever?
If you opt for b): where do you think we are now on the logistic curve, and why? And what happens at the plateau?
OK, quiz over.
Tot up your answers to find out which century you are in.
If you answered mostly A: Well done indeed. You will be able to find a steady job teaching the undergraduate syllabus in most university economics departments. With this combination of pre-1900s theoretical foundations and post-1950s unwavering conviction in eternal GDP growth, you will achieve a good standing in the field. But it might just be wise to steer clear of the real world (for its sake and yours).
If you answered mostly B. Oh dear oh dear. You are unlikely to pass any exams at all in economics with this kind of attitude. Forget about your articles being accepted by the top journals and give up on your dreams of a senior departmental appointment. But you know what, there’s a real world facing a crisis or two out there and a maverick approach like yours might just come in handy. Please, stick around, humanity needs you.
If you answered C. An agnostic mind: fabulous! Please hang out with the ‘mostly b)’s and make sure they don’t get too set in their ways. There’s an awful lot still to figure out….