What Economics (and Sociology) ought to be

vs. actually-existing economics and sociology

Economics ought to be a branch of what sociology ought to be.

Actually-existing sociology fell into a tar pit of Marxism some time ago, and it cannot get out. Marxist sociology looks at society in terms of power relations. There is a powerful class and there are exploited classes. The whole point of Marxist sociology is to expose and try to overcome these power relations.

What sociology ought to be is a more nuanced study of societies. Human beings do not just play a zero-sum power game. They play many different types of games, some of which are positive sum, in that many people end up better off.

Humans have many cultural tools, and these are evolving. There is much to study in how we relate to one another, and this series of essays presents some of the interesting issues. Issues like how we often cooperate but sometimes defect, how we organize to keep peace and to engage in war, how our competitive instincts sometimes are in a positive-sum context, sometimes in a zero-sum context, and sometimes in a negative-sum context.

Actually-existing economics is still mostly following in the footsteps of Paul Samuelson. He was part of the non-Communist left that rose to prominence in American intellectual circles in between the end of World War II and the divisions that arose during the Vietnam War.

Samuelson thought that economics was an exercise in applied mathematical optimization subject to constraints. Households solve optimization problems in order to maximize utility. Firms solve optimization problems in order to maximize profits. And government comes in as a sort of deus ex machina to optimize overall economic well-being by correcting market failures, taming the business cycle with Keynesian fiscal policy, and improving the distribution of income.

Public Choice theory tried to get away from this model of government as an omniscient social welfare optimizer. Instead, it looked at government policies as the result of optimizing behavior on the part of constituent groups and government officials. The constituent groups want “rents,” meaning wealth that can be obtained from favorable government policies. Officials want to remain in power and accrue wealth and status therefrom.

My short version of Public Choice theory is that government intervention in markets usually takes the form of “subsidize demand, restrict supply.” In health care, education, and housing, heavy intervention serves to raise prices and spending. This is certainly good for people who make a living in those sectors.

I would try to steer economics away from sole reliance on the optimization framework. Instead, my preferred definition is:

Economics is that branch of sociology that examines the workings of the market as a coordination mechanism.

Key concepts include:

• specialization and trade

• roundabout production (producing goods, such as capital equipment, in order to produce other goods)

• evolution of production techniques and institutions

• supply and demand

• property rights, including the role of government in making them secure or insecure

• voluntary, bottom-up coordination (the market) and top-down co-ordination (commands, incentives, and regulations that come from government)

• misalignment of incentives. Within organizations, these are called principal-agent problems. In the context of markets, these are called market failures.

Many textbooks want to put scarcity and/or incentives at the center of economics. Those concepts definitely belong, but I do not rank them as highly as do other economists.

A useful way to think about what economics ought to be is to contemplate what you would want a first-year student to unlearn. Someone who has never taken an economics course is likely to believe that

• Businesses and their owners are always well off. They take advantage of workers and consumers.

• Profits are bad.

• High prices come from greed.

• Benefits provided by government cost nothing.

• When businesses are ordered to provide benefits, such as health insurance or family leave, this necessarily makes workers better off.

• The market causes problems, and government fixes problems.

• Non-profits are better for society than profit-seeking businesses.

Students should come out of an economics course understanding that:

• Profits are not automatic. The market is a profit-and-loss system. Profitable industries tend to expand, and expansion tends to compete away profits. Losses cause firms that make inefficient use of resources to disappear.

• Prices are determined by supply and demand, and they are held down by competition.

• Government-provided benefits require diversion of resources from other uses.

• In a competitive labor market, the costs of employer-provided benefits are borne by workers.(1)

• Markets and government are both imperfect. Markets have a mechanism for fixing problems and getting better. Profits and losses create incentives for improvement. Government lacks those incentives.

• Non-profits are not “nice” just because they do not seek profits. The nature of such organizations is that they focus on satisfying the desires of donors. Leaders of such organizations work to please donors. They can do so without necessarily doing good for the people that the organizations are supposed to help. Profit-seeking firms are accountable to customers. If customers are not happy, then they do not buy from the firm, and it goes out of business.

It is pretty clear that most college students who take an economics course fail to unlearn some or all of what they ought to unlearn. In fact, there are people who go all the way through a Ph.D program in economics without unlearning non-economic thinking.

(1) For example, suppose that the firm can afford to pay a worker $50 an hour without mandated benefits, and mandated benefits cost $10 an hour. Then mandated benefits will drive the worker’s pay to $40 an hour. If there were no mandated benefits, then workers would get $50 an hour and then choose how much to spend on what the benefits were for. Those who value the benefits at $10 or more will pay to obtain the benefits that otherwise would have been mandated. Other workers will choose to spend less on benefits that they value less. Mandated benefits leave them worse off.

This essay is part of a series on human interdependence.