The Problem With Economics Today

Posted: May 30, 2011 by Zeddington in Economics
Tags: , , , , ,

There is a problem with the way that economics is taught in classrooms today … it’s wrong. There are whole books written about the question of what exactly is wrong with economics today, but this blog post will focus on just one simple, yet extremely important aspect: reductionism. The dictionary defines reductionism as “the practice of simplifying a complex idea, issue, (or) condition … especially to the point of minimizing, obscuring, or distorting it.” We observe a degree of reductionism in every aspect of what we do, so why is it such a big deal, particularly in economics?

Lets start at the basic building blocks of textbook economics. An ‘market’ is a system where buyers and sellers meet. Buyers want something, and sellers offer that something to buyers, in exchange for currency. Suppose its a market for cars. Lets assume its a perfectly competitive market, meaning that all sellers are selling an identical product, have identical costs, and sell for an identical price, so that, for Joe Consumer, it doesn’t matter who he buys the car from, he’ll always pay the same price for the same car.

How much does a car cost? Well, in a perfectly competitive market, the price of a car equals the cost of producing that car (the marginal cost). Suppose that the cost of the car is made up of fixed costs (the factory, fixtures, etc) and variable costs (labor, materials, etc). The total cost of the car is the sum of all these costs for that car.

Economics, as taught in classrooms across the world, has little to add beyond that, in our small example. It is seen as a closed system, with no relations to other systems. The unit of measurement is the dollar (or whatever currency we choose), and it is about the flow of goods and services between firms and households. The impacts of economic activity on the environment, the ecosystem, society and culture are all ignored. But how can they be? Without the biosphere, there could be no economic activity! Oil is pulled up from out of the ground, and used to create goods and services, and transport them across the globe. Trees are felled for paper, wood, and other products. Coal from under the earth is used as a source of energy. The fish of our oceans are decimated for the satisfaction of our deep bellies. The biosphere is also crucial to absorb the products of our economic activity – no, not the goods and services, but the pollutants, the greenhouse gases, and other harmful byproducts.

In that sense, we cannot reduce the economy to a simple exchange of a few products without looking at the wider – and most certainly important – effects that result directly from our activity. The discipline has made some half-assed attempts at factoring these in, there the concept of “externalities”, i.e. stuff that is external to economic theory. And still the concept of monetizing these externalities is used, as if you can ever accurately put a price on such things. Can you put a price of climate change? On species extinction? No, you can’t.

The economy needs to be seen as a system within a system: a human system of trading goods and services, within the greater biosphere of our planet. It is especially crucial to recognize the role of economic activity in today’s world, where the threat of climate change looms larger than ever – according to this report, carbon emissions have hit a record high despite the recent recession. Economic policies can no longer be made in isolation of the global reality.

But frankly, its inconvenient. It’s not just a case of ignorance. Its a matter of interests. There is a reason that the economic discipline looks the way it does, and a reason why it is so powerful and well respected. We’ll leave that to future posts.


Before I go, have a look at this blog post about Strauss-Kahn and the maid who accused him of sexual assault. It makes the very good point that, without union backing, she would likely have never been able to make such a complaint against such a powerful man.


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