Of Blow-Hards and Napkin Backs

A confidential guide to armchair economics

The frictionless inclined plane of psychosis. | Photo art based upon napkin photo at ReinyDay

Wayne Huang, The Cornell Progressive | Admittedly, economics is neither the most decisive nor most precise discipline out there. We know of at least one philosophy (!) professor who has spent half of his life blogging about why economics should NOT be a Nobel Prize category. After all, it’s not an exact science—nor is it a noble cause, like physics, or peace. In fact, economics is probably more comparable to psychosis.* It is thus, perhaps, understandable that we econ majors sometimes get a little defensive when philosophy majors try to make fun of the completely unrealistic assumptions (but they’re standard in the literature!) that we use to formulate completely unrealistic models.

So, nothing pains us more than to see conservatives (as well as liberals and AEM majors) exacerbating the problem by pretending to be armchair economists. Typically, this type of student has just taken introductory economics and is now on a mission to take the completely unrealistic models and completely unrealistic assumptions they learned about in class and twist them in a horridly naïve way. In this manner, they are then able to pelt less-informed persons with supply and demand curves and insist that economics really is so simple: “See? Once you raise the minimum wage, then employment HAS to go down!” The bewildered victim, who probably knows no more about a demand curve or the concept of opportunity costs than the self-proclaimed armchair economist, submits in deference to the armchair and admits defeat.

Unfortunately, economics is rarely so simple and many fail to realize that an introductory class is just that—an introduction. We still recall when some Republicans in Congress were rather taken aback when the U.S. economy did not go into recession after Clinton raised taxes on the top income bracket in 1993 to stem Reagan’s leftover legacy of budget deficits. Despite the unwavering certitude of several Republicans’ predictions that deficit reduction would push the economy into recession, the U.S. underwent the longest economic expansion in history (with the distinction of the second-longest expansion going to Lyndon Johnson in the 1960s). Oddly enough, these same Republicans then tried to take credit for the expansion that they predicted would not occur. After all, according to Cato and the graph in your introductory macro textbook, raising taxes distorts incentives and must be bad, right? Perhaps, but they forgot to mention that budget deficits distort incentives in the financial market too. To give another example, a recent article in the esteemed and typo-filled Cornell American (“100 Hours to Find a Pen,” Feb. 2007) lambasted the new Democratic majority in Congress for passing all sorts of rubbish legislation, such as “student loan interest rate cuts” and “minimum wages.” The article employs the old cocktail napkin theory that minimum wage hikes inevitably lead to job losses and higher unemployment rates. The only problem is that this canard has long been plucked at and beaten to a bloody death by empirical research conducted by professional economists. Yet, the author warns ominously: “If the unemployment rate begins to climb again in the next year than [sic] the Congress will have no one but themselves to blame.”

The author then proceeds to explain, in a rather condescending way, that if the Democrats cut interest rates on student loans, a simple supply and demand graph (he kindly reminds us that quantity is on the X axis and price is on the Y axis) will predict that a huge influx of students will now be able to afford college and therefore drive tuition rates up.

Setting aside the rather pesky reality that higher education in the United States doesn’t even bear the slightest resemblance to a free market, we looked up what Ronald Ehrenberg, Cornell’s well-regarded expert on higher education, had to say about the argument that financial aid was a major contributor to skyrocketing tuition rates. His answer was rather blunt: “there is very little evidence that this has occurred.”

Of course, we don’t blame the students for believing that everything in their Econ 102 textbook is a substitute for reality. Nor are we saying that these basic principles are worthless, as they do serve as useful tools for understanding the way economists think. On the other hand, buyers beware. We econ majors don’t like it when you remind us that our beautiful theories are about to be murdered by a brutal gang of facts.**

* Jones and Wilson (1995): “Economics is a closed system; internally it is perfectly logical, operating according to a consistent set of principles. Unfortunately, the same could be said of psychosis.”
** Quote stolen near verbatim from Professor James Gordon, who has an antipathy for economists and an even greater contempt for lawyers who think like economists. End.