Learning Economics


Each year, thousands of people study economics, but not many learn it. Most of them leave their economics courses ignorant of important basic facts, such as the differences in the standard of living over time and across countries, as well as basic economic principles, such as the way that a global oil market renders meaningless the notion of “energy independence.”

Of course, there are many educational deficits to complain about in the United States—science, geography, mathematics, and so on. What is frustrating about the deficit in economic education is that it afflicts journalists, policy analysts, and other professionals whose work requires basic competence in economic analysis. Their failure to learn economics is equivalent to the failure of a physician to learn basic human anatomy.

I believe that some of the fault lies with the top graduate schools in economics, such as the Massachusetts Institute of Technology, where I obtained my Ph.D. The focus on mathematical training in these programs is so intense that they tend to produce a sort of idiot-savant, competent only to publish in academic journals. It pains me to see economists for whom expounding economic principles and speaking in plain English are mutually exclusive activities.

Ours seems to be the age of the Partisan Hack. Looking over the list of best-selling books or the roster of columnists at top-drawer newspapers, success appears to correlate with mean-spirited attacks and heavy-handed rhetoric. Whatever happened to logical analysis of economic policy designed to illuminate as opposed to rabble-rouse?

When I was young, economists Milton Friedman and Paul Samuelson wrote regularly for a major news magazine. They wrote to educate and to persuade. If their columns were to appear among today's journalistic mudball fights, they would seem as quaint and unfamiliar as opera would be to a pop-music audience.

This book attempts to express what I call passionate reasonableness. By reasonable, I do not mean centrist, indecisive, or compromising to settle differences. I mean taking positions on public affairs based on facts, knowledge, and intelligent analysis of the consequences of policy proposals. I mean trying to persuade rather than mock those who take a different point of view. I mean trying to appeal to rather than insult the intelligence of the average reader.

In addition to an absence of reasonableness, today's economic journalism lacks perspective on technological dynamism. When I gaze into the future, I see rapid economic and technological change. While the economy as a whole will grow rapidly, the majority of today’s companies may disappear in the next twenty years! Entire industries will be born, thrive, and die within a decade. Children born in the early part of this century will grow up with totally different concepts of privacy, mental and physical well-being, and the relationship between humans and technology than what we are used to.

Unfortunately, few people today are in a position to see what is happening. Those who are not familiar with either leading-edge technology or economics--including the overwhelming majority of high school teachers and probably the vast majority of college professors—have almost no sense of the pace of change. People who are involved with information technology, nanotechnology or biotechnology can see the excitement within their own fields, but they may fail to apply the logic of exponential growth to the whole picture. Most economists, who can calculate exponential growth and appreciate its impact, seem to ignore or deny what is happening in the key technology sectors.

William Gibson, the science fiction author who coined the term “cyberspace,” has been quoted as saying “The future is here. It just hasn’t been distributed yet.” Today, it feels to me as if the future has been distributed to only a select cadre of science fiction writers, technology executives, and a handful of economists.

This book can help you think about public policy and rapid technological change. For those who do not have time to take a formal economics course, it can provide some insight into the economist's thought process. For those who are studying introductory economics, this book can provide additional food for thought, the way that Robert Heilbroner's The Worldly Philosophers and Alan Blinder's Hard Heads, Soft Hearts helped to illuminate economics courses in past years.

The title Learning Economics has a double meaning. It suggests a book that is intended to have educational value. However, it also refers to the economy itself as a system for learning. Traditional textbooks define the economic problem as "allocating scarce resources among competing ends." This completely misses what is arguably the most important economic phenomenon of all--the rise in the standard of living that represents what economists call growth. Economic growth is due primarily to the accumulation and successful application of knowledge.

This concept of economic growth as a learning process, which might receive offhand mention in mainstream textbooks, is central to the thinking here. Thus, even professional economists may find the perspective here to be somewhat novel.

The Plan of the Book

Each chapter in the book is a self-contained essay. The essays are grouped into main topic areas, each with its own themes.

The first topic area is called "What's Different About Economics?" The chapters emphasize the contrast between the way non-economists think about markets and behavior with the analysis that economists have developed. An important theme is that market-mediated trading among strangers is a distinctive form of human interaction. Many stubborn economic fallacies consist of people confusing trading with sharing. Another common misconception is failing to appreciate the difference between voluntary economic exchange and the exercise of coercive political power.

Economists are known for cynical realism, as embodied in the saying "There is no such thing as a free lunch." Nonetheless, the economics of learning is optimistic in an important sense. Many forms of human interaction are zero-sum games, meaning that one person's gain is another person's loss. In contrast, the economic processes discusses in the first half of this book are all positive-sum games, meaning that on average they produce benefits. Economic growth raises the standard of living for the entire society. The discoveries taking place in the field of computer science, which follow something called Moore's Law, are supporting economic growth at an accelerated pace. The phenomenon of international trade, which economists have understood for over 200 years to be a positive-sum game, is potentially enhanced by new information and communication technology.

The second topic area is called “Growth, Technological Progress, and Decentralized Innovation.” The chapters emphasize the causes, consequences, and challenges of a learning economy, in which new production techniques are discovered and older techniques are discarded. An important theme is that the widespread improvement in our standard of living is a relatively recent phenomenon. Economic existence was stagnant and squalid throughout much of history, and even today prosperity is elusive in many parts of the world. The third topic area is called “Moore's Law, Progress, and Displacement.” The chapters draw out the benefits and dislocations brought about by rapid ongoing innovation in the design of microprocessors for computers. An important theme is the disruptive impact on mass media industries, such as news and music publishing.

The fourth topic area is called “Free Trade.” The chapters renew the classic economic arguments for free trade by applying them to current issues, such as the rise of China in manufacturing, the outsourcing of white-collar work to India, and our “dependence” on foreign oil. An important theme is that punishing another country by reducing imports is a policy idea that does not hold up under close examination.

The fifth topic area is called “Macroeconomics and Bubbles.” The chapters focus on the episode of the Internet Bubble in the stock market, with the subsequent crash and its consequences for the economy. A main theme is that economic policy in the post-bubble recession, while not perfect, was surprisingly constructive, and certainly did a better job of cushioning the economy than the policies that followed the stock market crash of 1929.

The sixth topic is called “Social Security, Health Care, and Education.” These chapters offer alternatives to our current way of thinking about government involvement in those important areas. One theme is that in order to keep Social Security and Medicare from taking an ever-growing share of national income, we probably need to adjust the retirement age upward as the quality and longevity of life continues to increase. On education and health care, I make the case for radically less government service provision. Instead, I argue for a “bleeding-heart libertarian” approach to government that I suppose more than three-fourths of all economists would view as too libertarian, with a smaller proportion finding my approach congenial and an even tinier proportion finding it too paternalistic.

If you have browsed this far, then I challenge you to read the rest of the book. I expect that you will find many ideas to mull over—more than what can be absorbed on one plane ride or a day at the beach. I hope that you find it rewarding, and that you may even find yourself referring back to and re-reading some of the chapters. I appreciate your sharing your time with me.

—-Arnold Kling