Economics 101 was a great challenge during my studies. When I took the introductory required course I had no economics background or particular mathematical skill. The first day the professor put on blackboard a supply and demand curve. He explained that all economic theory was based on a simple formula: As demand rose, supply diminished. As supply rose, demand diminished. There was something elegant but puzzling here. Could all human activity be reduced to this simple formula? Could all our behavior be shown in mathematical equations and linear charts?
My questions to the professor were met with a stony look. He answered that the rest of the course would be based on the above assumptions. He kindly invited me to his office after class during which I expressed my doubts about his assumptions. We agreed that in order to pass the course I would have to learn the assumptions, but he was generous enough to say that I did not have to believe what I was learning.
I was always well prepared for class. During the year he would call on me when the other students were having difficulty following. I conscientiously learned material I did not believe. My doubts about the assumptions, however, remained.
Have I finally been proven right?
Although the professor is no longer with us to question his assumptions, the rise of Donald Trump and the British vote on Brexit have raised questions about the validity of traditional economic theory. While the theories taught in Economics 101 have been agreed upon by almost all economists, bankers and others involved in academia and policy making, the general public is rejecting these assumptions. Populist movements reflect growing dissatisfaction with higher stock markets and GDP growth. There has been little trickle down from the billionaires.
People outside the economic elite are not failing Economics 101; they are actively raising questions about the assumptions. They want different economic theory. Those who haven’t taken Economics 101 but have been submitted to the practices taught therein want different economic policies based on different economic theories. Not everyone wants to optimize possibilities and minimize waste.
Donald Trump is against international trade agreements, but economists tell us that these agreements benefit the countries involved. Brexit supporters “want their country back,” but economists tell us that customs unions also benefit the countries involved. In other words, popular opinion is turning against the economic elite because the rational logic behind their economic theory may have helped the elites and the countries’ GDP but it has not helped the majority of people.
Recent surveys indicate that people do not always make choices based on efficiency. Emotional economics has become a growing sub-field that tries to take into account how emotions guide peoples’ decisions. There has been some movement away from formulas and charts, away from efficiency as the primary driving force.
The recent rise of populism goes beyond simple emotions. Individual lives cannot be measured by regression curves or statistics. The Trump phenomenon and Brexit should be wake-up calls to those who use abstract logic to devise public policies.
Adam Smith was an 18th century Scottish moral philosopher. He is best known for The Wealth of Nations, which is considered the first modern work of economics. But, he also wrote The Theory of Moral Sentiments. Sentiments matter. It is time to go back to thinking beyond the logic of traditional Economics 101. It is time to change the curriculum.
The people have spoken and will continue to speak. Their logic is not the classroom logic. It is a logic based on their everyday lives. Economists have become detached from that reality. Democracy is the expression of the will of the people. If only economists could get out from behind their computers they would see the inadequacy of their theory. At least they would see that they have not convinced many people.
I passed Economics 101 with an excellent grade. The next day I forgot what I had been forced to learn. Will the policy elite be capable of seeing the limits of their theory? Or will they undemocratically stubbornly insist that Trump and the Brexit followers are wrong?