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Economism’s Invisible Hand Guides Privatization Movement

April 24, 2017

“How Ideologues Use Grade School Economics to Distort Minimum Wage Debates”, James Kwak’s thoughtful article in Evonomics, could have just as easily been titled “How Ideologues Use Grade School Economics to Promote Privatization”. At the beginning of the article, Kwak coins the term “Economism” to describe the over-simplified faith in the marketplace that dominates the anti-government mindset that defines both political party’s economic policies. Here’s Kwak’s description of “Economism”:

Economism is the belief that basic economics lessons can explain all social phenomena—that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an Economics 101 textbook. Ideally, students should learn that the competitive market model is just that—a model, which by definition abstracts from the real world. According to the rhetoric of economics, however, the lessons of Economics 101 can be transplanted directly into the real world. The central idea that free markets maximize social welfare becomes a universal framework for understanding and answering any policy question. 

Kwak elaborates on how this mental model has permeated the thinking of both political parties, noting that both President Clinton and President Obama based their economic policies on the premise that the magic of the marketplace would provide social well being:

As the mantra of free markets, small government, and lower taxes became more popular with voters, Democrats adapted by also paying homage to competitive markets. It was Bill Clinton who said, “The era of big government is over.” And Barack Obama’s signature health care reform program is centered on the idea of using (regulated) market competition to expand access to health insurance.

He didn’t say so, but he could have noted that Mr. Clinton set the stage for NCLB’s premise that “failing schools” could be improved by introducing competition and RTTT’s premise that more charters inject Economism’s faith in the competitive marketplace into public education thereby opening the door to the privatization movement. But in Kwak’s view, Economism oversimplifies the reality of economics. Instead of intruding one single model in basic economics instruction, Kwak suggests we look beyond the mathematically based supply-and-demand curves to the reality of human behavior:

If we were to redesign Economics 101, what would it look like? One possibility is to begin not with abstract models, but with the real world. How do companies use technology to produce goods, and how are those companies organized? How are products and services distributed, and how do manufacturers, intermediaries, and retailers set prices? How are wages determined—not in the theoretical model, but in real life? What factors determine the set of opportunities available to different people in different parts of the planet?

The economist Partha Dasgupta, for example, begins his “very short introduction” to economics by describing the different material and economic conditions of two families, one in the suburban United States and one in rural Ethiopia. Students who begin with a grounding in the way the world actually works will be better equipped to understand the limitations of abstract models when they do learn them.

Alternatively, we could begin with real human beings. An introductory course in behavioral economics would reveal that we all make decisions irrationally, at least compared to the utility-maximizing entities who populate the typical textbook. The same is true of organizations, which are populated by fallible human beings who often have their own interests at heart. Understanding the importance of habit, convention, prejudice, and other factors will enable students to resist the allure of models that assume superhuman actors and perfectly efficient firms.

Or, perhaps, we could do away with the idea of Economics 101 altogether. I studied history and I teach law, neither of which has a single “101” class. There could be one introductory class called “Economic Institutions Around the World,” another called “Decision Making by Individuals and Organizations,” a third called “Economic Development Through History,” and a fourth called “Abstract Economic Modeling” (what is now “Economics 101”). Economics majors could take them in any order they wanted, and non-majors could take only those that interested them. People who take only one economics class would not necessarily be indoctrinated in the myth of the invisible hand; students who are serious about the field would learn everything they need to learn, but with the context necessary to understand the uses and limits of simple models.

The premise of economism is that “economics” says only one thing: that unregulated competitive markets produce the best outcomes for all people. One antidote is for people to understand that economics is a fascinating discipline that provides many answers to many different kinds of questions—and to seek out those answers for themselves.

Economism dominates our thinking because most college students take only one course in economics and it covers what Kwak defines as “Economism”… and the kinds of “economics” course advocated for high school is typically a “survival skills” course that teaches students about personal budgeting, and personal budgets that “must be balanced” lead to the simplistic ideas that federal budgets must be balanced, overlooking that fact that the mortgage payments, car payments… and student loan payments for that matter… are all forms of indebtedness that are part of a citizen’s personal budget. In the same way, the federal budget needs to the on debt to invest in infrastructure and the well-being of its citizenry.

If we want to improve the well-being of our citizenry in the future, we need to move beyond the “myth of the invisible hand” and recognize that unregulated capitalism will not lead to equal opportunity for all.


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