But what does this fable actually say? When someone says ‘It’s Economics 101’, they assume it to mean that a college course called ECON 101 supports their argument. But what does this class in basic economics actually teach?
It’s not a perfect analogy, for certain. As noted, there are almost certainly ways to make changes that affect the economy in a way that doesn’t just lead to everything coming back to equilibrium at the same old position. Progressive taxes that are funneled into social programs, for example, are going to create a permanent difference in the income distribution. Raising the minimum wage, despite what I said, could have some effects due to differences between our economy and others - a relatively static price on imported goods, for example. (Though, you could argue that eventually those prices will raise to match, as well.)
Mostly, though, it doesn’t model the advancement of technology. One of the most fundamental ideals of Capitalism that we care about is the progressive improvement of our ability to produce things at a lower cost of capital/resources. That’s entirely untouched by a circulatory model. And, similarly, circulatory models don’t cover the psychological aspect of macroeconomics. Of course, macroeconomics itself is iffy on that. Stimulus is our only real idea, and Japan alone has been disproving that theory for nearly 30 years now.
I don’t think there’s been a stable definition of this over time. Rather it’s an expression of “common sense”, normally defined as how price manifests as a relationship between supply and demand. In the 1970’s when the supply of gasoline was constrained, the price soared. Nixon imposed price controls, and the result was shortages and long queues. That’s what I recall as the economic common sense that they hammered into us in school.
As for actual “economics 101”, there was a lot of boring shit about the velocity of money and IDK what else. My high school economics teacher allowed me to sleep through class and let me make up the difference via extra credit. He is now a highly successful marijuana dealer, and I’m still a shitty economics student. I report, you decide.
In other words, both sides agree that consumer spending is the real fire that drives the steam locomotive that is the economy, but they differ in how to best make that locomotive go fast One side, in essence argues that the government should directly add more fuel, indirectly causing a need to release more steam to the cylinders, while the other side argues that you intentionally let more steam into the cylinders to drive the train faster, and by extension, obviate the need for more fuel to keep the steam pressure up.
Neither’s necessarily wrong in a locomotive-driving sense, but when you’re dealing with real people, the consumer stimulus option seems to provide perceived gains to individuals in ways that a trickle-down stimulus does not.
On a first order basis it doesn’t matter how you stimulate. Like I said, informed people across the spectrum realize that tax cuts or even subsidies to companies are paid to ‘consumers’, since all the relevant entities involved in companies (customers, employees, owners) are themselves consumers. There really is no such thing as a company per se economically.
However practically speaking it isn’t true that there’s no different what means or channel is used to provide a stimulus. Yes it’s a bigger question how big the stimulus should be or whether it’s appropriate to have any at all, or even deliberately slow an overheating economy though govt action (though that’s more likely via monetary policy not fiscal with ‘stimulus’ has come to imply). But lots of serious people, not just ideological internet jib-jabbers who don’t actually know anything about economics, debate the relative merits of delivering a given size fiscal stimulus via a tax cut and if so which taxes, or a spending increase, or which combination.
The difference economically is as mentioned, more of some types of stimulus might be saved rather spent. Some types might result in spending outside the closed system (eg. consumer spending on imports isn’t going to stimulate the domestic economy as much). Some might result in more or less permanently useful tools for future growth (needed infrastructure funded with stimulus spending v non-necessary or inefficiently chosen pork barrel projects or even disguised payoffs to political constituencies masquerading as ‘infrastructure’).
But the basic point where it’s worth risking repetition is that getting for example from a $50k GDP to 100k in inflation adjusted 's in the shortest number of decades is not directly related to stimulus or ‘making things flow more rapidly’ by a simple policies of spending more relative to tax intake or vice versa. It’s going to be achieved by some combination of more capital per worker and a higher total factor productivity (output for a given set of inputs of worker and capital). That will be influenced by govt policies but more from how they incentivize formation of more capital and introduction of more efficient means of production. But again, often the goal is not just or necessarily growth, it’s also (re)distribution of income or wealth.
A lot of times when people say ‘well Econ 101 is wrong’ they are arguing for some goal other than growth, with a person who is assuming growth is the goal and referring to ‘Econ 101’ in that context. Proof that classical economics ‘doesn’t work in the real world’ is a lot scarcer when you correct for the many (or most) cases where people are talking past one another that way.
The easiest way to find this out would be to take such a class, or to look inside a “Principles of Economics” textbook used for such a class.
From the Table of Contents of one such introduction/principles textbook by Cowen and Tabarrok:
Econ 101 (intro to microeconomics) could cover the preface and Parts 1 through 5.
Econ 102 (intro to macroeconomics) could cover the preface, Part 1 and the beginning of Part 2, and then Parts 6-8.
Not really. A transaction requires a buyer and a seller. Corry El is right that, on a situational basis, targeting one side of the equation or another might make more sense - or even refining it even narrower to a specific industry or whatever. Don’t take what I’m saying as an argument against what he’s saying. I don’t disagree with what he wrote.
But at the highest, eagles eye view of things, it’s largely a question of semantics to differentiate between helping the buyer or seller. The goal is to get the transaction to occur (or to not occur) at a frequency which is advantageous to the marketplace.
Think of it like algebra. Which of these equations is better?
a + 5 = b
a = b - 5
Just because they’re written differently, that doesn’t mean that there’s actually any meaningful distinction. And people should understand that this is the case in a very large sense, even if once you get into the details it stops being true (due to psychology, the amount of time it takes for money to move around the system, how money might stick to certain points, etc.).
It is and isn’t a matter of semantics. Accepting that it is semantics is a first step towards approaching the idea that it isn’t just semantics, or else you’ll lose the forest for all the trees.
It sugar-coats free-market economics, indoctrinating students to lock their mindset into free market being the only economic dynamics they will ever need to analyze, which is probably true, since it is the official state economic theory, being unquestionedly embraced by every relevant political party… It parallels the concept of Religion 101 limiting itself to the state religion, and if any other faiths are mentioned, they are simply dismissed as false dogma.
When consumers get money, they either spend it or save it. It has been shown that people have mental buckets in which they put their money, and what they do with money in these buckets is different. Bush, to increase consumer spending, sent out checks. Getting a big check seems to encourage savings, so more of this money was saved than expected. Obama decreased the SS tax, I believe, which meant that people get slightly more in their paychecks and not a big chunk. That seemed to increase consumption more.
Behavioral economics, unfortunately, is probably not taught in Econ 101. Though maybe this has changed.
Man, how wrong can you be about something? Wait, please don’t take that as a challenge.
Oddly enough there are experiments which show that people give different answers to the same eocnomic problem when it is expressed in two different yet equivalent ways. I can dig it out of our tutorial if anyone is interested.
While consumers will spend more if they anticipate better times ahead, they can also spend more instantaneously given extra money. It is much harder for businesses to hire instantaneously, so spending is more in anticipation of increased demand. I’ve never seen a convincing explanation of why I as a business owner would use more money from the government to hire assuming a forecase of flat demand, as opposed to putting it in my pocket.
Oh, I see what you’re getting at – What does the layperson on Facebook, the tweeting twit, mean when they say “It’s Economics 101”.
It means that free-market economics is the official state ideology of the USA, and that what you say or think about economics had damned-well better conform with free market economics, and that should have been taught to you, whether or not you took a formal course in Economics 101, where it certainly would have been taught to you.
It means “What you’re saying is inconsistent with the mantric dogma of free market economic theory, the carved-in-stone letters above the door.”
People who criticize Economics as a study for failing to accurately predict the future or solve all of man’s problems are like people complaining about how a Physics 101 class doesn’t prepare them to design and build a commercial jumbo jet.
Oh, fuff. That’s precisely what economics as an applied study claims to be able to do, and its adherents never seem fazed by repeated and egregious failures of its models.
If you’re going to claim that a basic class in the principles represents something entirely different from what a… “master” knows and does, then you are even more casting it in the mold of a religion where the mysteries are only unfolded to adequately-indoctrinated practitioners. And thus only believed in by the indoctrinated.
But I’m good with that assessment. 
How many of the world’s Ph.D physicists called the Fukushima disaster, the explosion and fore on Deepwater Horizon, the sinking of the Edmund Fitzgerald, the Kansas City Hyatt Regency disaster, the crash of TWA 800…
I still think this argument is dodging the real question.
Economics sets itself up as the tool to analyze the movement of wealth among groups and often stands on its vast expertise - as evidenced by consensus models - that it is capable of not only analysis but prediction. Primly stepping back and claiming it’s something much more restricted is… somewhere between self-serving and deceptive.
Any physicist worth his or her education could have postulated any of those disasters. Some (especially those whose work bends towards engineering) did and have. The sheer lemming blindness of economists in positions to know better to fail to forsee 2007-2008 is forever an argument against the field being able to see discontinuities in future trends; it is a religion that cleaves to “tomorrow will be like yesterday, only more so” modeling. But with great precision in its numbers, just like astrology.
Halfway there.
This is what people mean when they use the phrase. But does ECON 101 actually teach that? Or does it teach the opposite? Where do ECON 101 classes actually fall on that spectrum?
I always likened economics with meteorology. Both are disciplines/sciences where it’s relatively easy to look at a very small scale or very short-term example and predict what is likely to happen. But as the size and the time scale grows, the number of moving parts and the uncertainty grows exponentially.
I mean, economists can probably reasonably predict the effects of a particular business raising or lowering prices, or what may happen if demand increases or decreases. They can probably even come up with some reasonably accurate predictions for a particular market/industry within a particular, relatively short time frame.
But predicting the action of an entire market over a long time frame, or of the entire economy over any time frame is about as likely as a weatherman predicting the weather 9 months from now. Doesn’t mean that either one is incompetent, or that their scientific chops are suspect, or even that their particular discipline is BS. It just means that it can’t be accurately modeled for whatever reason.
Where it gets sketchy, IMO, is when economic theories start being used as a guiding principle, and not as an analytic, or extremely limited predictive tool. That’s, I think, what the gripe against economists primarily is concerned with.
I’d agree, but in this we’re against most governments and the academic overlap thereinto.
My biggest objection to economics as it’s generally thought of and practiced is that it’s tautological - you can construct very elaborate models by building on supposition upon theory upon notion, and the model will work perfectly… however, you can take the same pieces to construct a model of wholly different design, and guess wot, that model will work perfectly, too. Multiply by about as many Ph.D/doctoral candidates as exist.
Which isn’t my direct objection - it’s that almost 100% of these models are government/industry/business-centric and the assumed positives are very much “what’s good for USA/GM/Big Oil is good economics.” Circular; tautological; virtually blind to consumers as any kind of individual.
I agree with most of what you say. But I need to register two nitpicks. “more like what liberals say conservatives say. :)” — OP hardly caricaturized conservative econ. He did oversimplify to force a strong impression, and I thought he did it well.
But more importantly, what about the sentence I underlined? I fail to grasp your point. Just for starters, are you excluding foreign shareholder?
I find your position somewhat “to the right” of best informed centrist opinion; there are many even more rightist than you for whose economics the thread’s deprecations are appropriate.
Let’s stop you right there. This is the comment of someone who doesn’t pretend to have taken Econ 101.
Would the 10% min-wage hike also cause a 10% rise in the price of imported oil? Is the ratio of banana and apple prices also constant in your model?
It is frightening how poorly predicted the 2008 crisis was. (Again as a nitpick, some did predict, some of these had PhDs.) My take-away from the 2008 crisis? There was a huge poker-game, with lots of big players including the world’s major banks. Too big-to-fail banks. Very profitable for some of the players, but not useful to society — indeed the public benefit was very negative. That was a lesson to take away. (I would also have forced bank recapitalization had I been calling the shots; agree?)
And now? In the aftermath of a huge credit crisis resembling the worst of the 19th century? The poker games go on, bigger than ever, and gleefully with the “Taxpayers will bail us out again!” meme in place.
One reason to put money into consumer hands rather than into the hands of the very wealthy is that, especially with interest rates so low, these enrichened pockets will be tempted to put their money into the best game in town, the trillion-dollar derivatives market, etc.
One lesson I hope all Econ 101 students take away is that the Bush tax cuts should have been very short-lived if stimulus was the intent, but instead became quasi-permanent oppressive rent, leading directly to a rapidly increasing debt (serving a malicious starve-beast intent), eventually disadvantageous when new stimulus is required. I think most of us agree that governments should run surplus in good times.
There is much truth here, abeit overstated.