July 2009 Archives

I know that's an odd way for an economist to start a blog post, but bear with me.  It's a little bit tounge-in-cheek.

So let's get the blog rolling again with a couple of links to completely unrelated items that nonetheless both fall under the heading of why basic economics as commonly taught is not adequate to explain the real world--and yet as far as I am concerned there is no better place to start.

First, we have an article titled "Tech Is Too Cheap to Meter:  It's Time to Manage for Abundance, Not Scarcity" by Chris Anderson, the editor-in-chief of Wired.  The article is actually an excerpt from his forthcoming book, which you can download in audiobook form on the site.  The excerpt ends:

The YouTube model is totally free--free to watch, free to upload your own video, free of interruptions. But it doesn't make money. Hulu is only free to watch, and you have to pay the good old-fashioned way, by watching ads you may or may not care about. Yet it generates healthy revenue. These two video outlets illustrate the tension between different variations on the free business model. Although consumers may prefer 100 percent free, a little artificial scarcity is the best way to make money.

Sound schizophrenic? That's the nature of the hybrid world we're entering, where scarcity and abundance exist side by side. We're good at scarcity thinking -- it's the 20th-century organizational model. Now we have to get good at abundance thinking, too.

Let me tell you, it is really exciting when economists discuss these sorts of things.  You might think that we're all about scarcity (well, actually we are), but we also like to think about cases where the usual laws of scarcity do not apply and where some goods are (nearly) free.

Conversations like that led to this paper by Jannett Highfill, Robert Scott, and myself.  (Which reminds me I need to update some things on the site.  This paper actually came out in print a while back  Journal of Economics (MVEA), v30, n2 (2004): 27-49).

In a world where goods are abundant, monopolistic competition flourishes.  Networks are of paramount importance.  And there are opportunities to make money by creating artificial scarcity.  None of this fits the standard Econ 101 model.  Yet it is all around us.  I have been trying to think about how to fit it into the standard Econ 101 type of course for some time.  I'm getting close.  Maybe that will be something I blog more about over time.

In any case, read the article.  I'll be listening to the (free!) audiobook.  And we'll pick this thread up again.

And then there was this by Chris Dillow (Stumbling and Mumbling).

PZ Myers rightly commends these words of Richard Feynman. There's a message in them too for people wanting to understand economics.

Feynman says:

People say to me: "Are you looking for the ultimate laws of physics?" No, I'm not. I'm just looking to find out more about the world, and if it turns out that there is a simple ultimate law that explains everything, so be it. That would be very nice to discover. If it turns out that it's like an onion with millions of layers and we just get tired of looking at the layers, that's the way it is.

If this is true for physics, it must be even more true for economics. In economics, the search for simple ultimate laws is impeded by the fact that people's behaviour is often* context-dependent; sometimes we're rational, sometimes not; often we're selfish, occasionally not; and so on.

For this reason, calls for a "new economics" based upon simple principles, such as this bilge, get things arse about face.

*not always - we can't generalize so glibly

The footnote is in the original.  Read the whole post.  He makes a reference to a new blog by Richard Murphy called "Enough Economics."   Now, I'm a firm believer that things should be made as simple as possible but no simpler.  So I was sufficiently intrigued to check out Murphy's blog.  In his first post, he comes out against the standard neoclassical assumptions that get pounded into undergraduate students:

I know that economists have tried to overcome the constraints these assumptions impose in higher level work. But that really does not matter. It is the basics that are taught in year one that people remember of their economics, and that is that life is all about profit and that unlimited growth is good.

And of course, he is correct that there is a vigorous research agenda in this area.  But we haven't figured out what out of that research is ready to filter down into the basic intro course.  It's a lot like the economics of abundance.  It seems to fly in the face of economic logic, but really it fits into the framework rather well...if you have a sufficiently broad view of that framework.  That is, if you have been taught to think that economics is more than supply and demand curves that are simply a pair of perpendicular lines.  That is, if you have been taught that marginal costs are not always increasing and may be close to zero.  That is, if you've been taught that there is more to life than money and that per capita GDP is not the be-all and end-all measure of growth.  All of this fits with my basic premise that the basic Econ 101 model is often over-simplified and dangerous if presented to a student without a good bit of circumspection.

But nonetheless, like Dillow, I'm skeptical of claims to simplify all of that thinking into a simple model.  I agree with Dillow that economics is a lot like Feynman's onion.  Now, if there was a good way to get that across to 18-year-old college freshmen, then I'm all ears.  Econ 101 may need a tune-up, but Murphy's version would be subject to the same critiques that are so easily leveled at courses coming out of the Paul Samuelson/J.M. Keynes tradition.

What we really need to do is give students the tools to be able to peel the onion.

At least this is the case for those of us from the academic persuasion.  I managed 3 posts in June.

Let me tell you what I've been doing lately.

Exactly 4 weeks ago today (Monday), I walked into the office to hear the news that a summer course needed to be covered and pretty much anyone who was still around and in contact was already teaching a course.

The course was daily (Mon.-Thurs.) for 4 weeks, and started that night.  It was a basic intro econ for business majors (even more introductory than a standard principles course).  So while it's not a difficult one, I had not done it before.

I said, "Ok."

I did mention that it started that night, right?

So there went June.  I managed to stay one step ahead and came out of it basically unscathed with a few dollars in my pocket.  It was a fun class to teach.  Lots of opportunity to talk about current events and some basic opportunity cost, supply and demand, taxation, trade, policy, etc.  I would do it again.

But now I actually want to get back into the saddle and blog.  This week might be slow.  I need to recover from the last month.  Soon, however, I will be attempting to resume a more normal blogging routine.