Economics 101

What happens to the job market when the government raises the minimum wage? For decades, higher education in the United States has taught economics students to answer this question by reasoning from first principles. When the price of something rises, people tend to buy less of it. Therefore, if the price of labour rises, businesses will choose to ‘buy’ less of it – meaning they’ll hire fewer people. Students learn that a higher minimum wage means fewer jobs.

But there’s another way to answer the question, and in the early 1990s the economists David Card and Alan Krueger tried it: they went out and looked. Card and Krueger collected data on fast-food jobs along the border between New Jersey and Pennsylvania, before and after New Jersey’s minimum wage increase. The fast-food restaurants on the New Jersey side of the border were similar to the ones on the Pennsylvania side in nearly every respect, except that they now had to pay higher wages. Would they hire fewer workers in response?

‘The prediction from conventional economic theory is unambiguous,’ Card and Krueger wrote. It was also wrong. Fast-food restaurants in New Jersey didn’t hire fewer workers – instead, Card and Krueger found that employment slightly increased. Their paper set off a hunt for other ‘natural experiments’ that could rigorously test economic theory and – alongside other research agendas like behavioural economics – transformed the field.

Over the past 30 years, PhD-level education in economics has become more empirical, more psychological, and more attuned to the many ways that markets can fail. Introductory economics courses, however, are not so easy to transform. Big, synoptic textbooks are hard to put together and, once they are adopted as the foundation of introductory courses, professors and institutions are slow to abandon them. So introductory economics textbooks have continued to teach that a higher minimum wage leads to fewer people working – usually as an example of how useful and relevant the simple model of competitive markets could be. As a result of this lag between what economists know and how introductory economics is taught, a gulf developed between the way students first encounter economics and how most leading economists practise it. Students learned about the virtues of markets, deduced from a few seemingly simple assumptions. Economists and their graduate students, meanwhile, catalogued more and more ways those assumptions could go wrong.

Today, 30 years after Card and Krueger’s paper, economics curriculums around the world continue to challenge the facile view that students used to learn, in which unfettered markets work wonders. These changes – like spending more time studying market failures or emphasising individuals’ capacity for altruism, not just selfishness – have a political valence since conservatives often hide behind the laissez-faire logic of introductory economics. But the evolution of Econ 101 is not as subversive as it may sound. Instead, it reflects the direction the wider discipline has taken toward empiricism and more varied models of economic behaviour. Econ 101 is not changing to reflect a particular ideology; it is finally catching up to the field it purports to represent.

In 2019, Harvard University’s introduction to economics course, Ec10, changed hands. The respected conservative economist and textbook author Greg Mankiw handed it over to Jason Furman and David Laibson. Furman was chair of the Council of Economic Advisers under the US president Barack Obama. Laibson, also a textbook author, focuses his research on behavioural economics – which he prefers to describe as ‘psychology and economics’. As part of this transition, the course textbook shifted from Mankiw’s popular Principles of Economics (5th ed, 2015) to Economics (2nd ed, 2018) by Laibson, Daron Acemoglu of MIT, and John List of the University of Chicago.

Their goal in revising the course was threefold, says Furman. First, the course should be coherent and helpful for students, even if they never take another economics course. Second, it should speak to issues students care about – climate change, poverty and inequality, for example. Third, it should reflect the way economics is practised today, which means more empiricism, more psychology, and more attention to market failures and public policy.

Historically, introductory courses have reflected the way that the field of economics evolved, says David Martin, an economist at Harvard and section leader for the course. Theory came first: 18th-century philosophers like Adam Smith and David Ricardo sketched out principles of how markets operate; 20th-century economists like Paul Samuelson and Kenneth Arrow turned those ideas into mathematical models.

This is science as described by the theoretician. Since then, a subtle but evident shift has taken place

Two developments in the late 20th century changed the field’s direction. First, computers made data much easier to find and to analyse. Second, advances in statistical theory led to new methods of inferring cause and effect from data. Those methods ushered in what economists dubbed the ‘credibility revolution’, and in 2021 three of its architects, including Card, received a Nobel Prize.

The empirical turn in economics upended the discipline, but textbooks have lagged behind. Publishers typically require that authors not change more than 15 per cent for any new textbook edition to avoid upsetting instructors, which effectively capped the pace at which Econ 101 could evolve. The 1997 edition of Mankiw’s introductory textbook, for example, includes a section on observation and the scientific method. It also quotes Albert Einstein’s claim that ‘The whole of science is nothing more than a refinement of everyday thinking’ and describes Isaac Newton seeing an apple fall and being motivated to develop a theory of gravity. This is science as described by the theoretician. Since then, a subtle but evident shift has taken place. In the textbook that Harvard uses, first published in 2015, empiricism is elevated to one of the three core principles of economics, alongside ‘optimisation’ and ‘equilibrium’. Their book includes sections on ‘evidence-based economics’ in every chapter.

Undergraduates in Harvard’s Ec10 read the Card-Krueger minimum wage paper in the second week of class. It’s introduced in a session on empiricism in economics, and the students complete a simplified version of the analysis, calculating the difference in employment at fast-food restaurants in New Jersey and Philadelphia before and after New Jersey raised the minimum wage. The lesson is that ‘economic theories are only as good as the predictions they allow us to make about behaviour,’ says Martin. ‘The way we generally teach is facts first,’ he says of the course. Where theory once led, it now follows.

The theory side of Econ 101 is changing, too. The workhorse of introductory economics courses is the model of a perfectly competitive market. Students were traditionally introduced to its principles by reasoning about a consumer good with which they were already familiar, like pizza or ice cream. If a slice of pizza is free, how many will you take? (Several.) What if each slice costs $4? (Fewer.) What if each slice costs $40? (None at all.) This armchair reasoning forms the basis of a demand curve, where the quantity of a good (pizza) is higher when its price is lower.

The exercise is then repeated for the supply side where things work in reverse: the higher the price, the more people will find it worthwhile to make and sell pizza. And the point where supply and demand meet is the market equilibrium. The model assumes that buyers and sellers are all rationally optimising according to their preferences; they act so as to maximise their ‘utility’.

Harvard students still learn this model, in the second week of class. But the third week of Ec10 kicks off a series of three lectures challenging its key premises – in particular, the idea that people are purely selfish, perfectly rational maximisers. Instead, over three lessons, students are introduced to psychology, game theory and ‘social economics’ – which includes questions of fairness, trust and altruism.

Students learn that, even when people are motivated and trying to optimise, they often aren’t perfectly rational

In one class, students play a game called the ‘Keynesian beauty contest’, where everyone picks a number between one and 100. The rule is that the student whose pick is closest to two-thirds of the class average wins $10. What number should they pick? If guesses are random between one and 100, the average will be around 50, and two-thirds of 50 is 33⅓. But is 33⅓ a good guess? If everyone does that math, they’ll all guess 33 – and two-thirds of 33 is 22. But what if everyone does that math? Then the best guess would be two-thirds of 22, and so on. If everyone is purely rational and believes everyone else to be rational too, then the best guess is zero. That, in game theory lingo, is the Nash equilibrium.

In reality, the most common guess is 33, followed by 22; the third most-common guess is zero. The point of the exercise is that the game-theoretic prediction fails to match up with the real-world behaviour. Students learn that, even when people are motivated and trying to optimise, they often aren’t perfectly rational (even Harvard students).

Students also play the dictator game, where one student is given money and has the option to keep it all for themselves or to share it with another student. Most people share at least some of their windfall, says Martin, showing that ‘even when given the opportunity with no repercussions to be super greedy, a lot of people will give some money to the other person.’

These exercises challenge the notion that human behaviour is mostly selfish and rational. Such challenges to ‘Homo economicus’ have long had a place in economics textbooks – in the very back. Courses mirrored the textbooks, with ‘back of the textbook’ lectures on topics like altruism coming at the end of the semester.

Ec10 integrates this material throughout the course and teaches it alongside more classic models. ‘From the first second we teach (the competitive model of supply and demand), we say we’re going to teach tons of ways it fails or goes wrong,’ says Furman. What was once supplementary is now a central part of Econ 101.

Harvard is not alone in its shifting approach. In fact, for a team of economists in the UK, it doesn’t go far enough. A decade ago, they set out to ‘bring the back of the textbook to the front’ and, most controversially, to relegate the classic model of a perfectly competitive market to the back of the book.

‘The spark was the financial crisis,’ says Wendy Carlin, an economist at University College London, of the unorthodox textbook she helped to create. Students wanted to know what had gone wrong in the global economy, and introductory courses struggled to provide an answer. Margaret Stevens was having the same problem at the University of Oxford: many of her students were undergraduates in philosophy, politics and economics – and finding that the latter couldn’t answer the questions they had about the post-crisis economy.

In truth, the examples in economics textbooks were ‘chosen to fit the model’ being taught, says Carlin. Whereas ‘when researchers work on a problem, we start with a question in the world – and often some descriptive data, some hunches,’ she says. ‘And then we step back and think: “Which economic tools and which concepts are going to help us make progress on this question?”’

Carlin and Stevens teamed up with Sam Bowles, an economist at the Santa Fe Institute, to launch a new, open-source economics textbook published by CORE Econ and called The Economy 1.0. The first edition launched online in 2017. Earlier this year, the project – now with dozens of contributors from around the world – published the second version of its microeconomics curriculum.

They wanted to write a textbook that would draw in students and keep them motivated

For Bowles, the project recalled his correspondence with Martin Luther King Jr in the late 1960s. They’d met through anti-war activities, and King sent Bowles a list of economic questions he wanted help in answering. ‘I opened the list when it came,’ says Bowles. ‘I didn’t have a clue about how to answer any of them. It wasn’t just that I didn’t know the answers – I didn’t know where to look.’

Carlin, Stevens and Bowles had all been teachers before they were economists: Carlin has a degree in education; Stevens taught high-school mathematics; and Bowles taught high school in Nigeria. They wanted to write a textbook that would draw in students and keep them motivated.

The result is a textbook unlike the ones most economics students encounter. CORE Econ begins by charting the ‘hockey stick’ trendline of both economic growth and greenhouse gas emissions. The first chapter spans technological innovation, Thomas Malthus’s theory of population growth, and colonialism. It is now used by almost 400 universities on six continents, according to CORE Econ, and in just over half of UK universities that offer an economics degree.

In CORE, the classic model of a competitive market does not make an entrance until Chapter 8. ‘What CORE is doing in micro(economics) is trying to bring to the intro classroom what grad students have been taught for a long time,’ says Bowles.

For example, in the CORE textbook, firms are introduced as having the power to set prices. That might sound obvious but it’s not how things work in the typical introductory model of a perfectly competitive market. In that model, there are lots of identical sellers and the market sets a price. Firms can choose to either sell at that market price or not sell at all. Imagine a street with several very similar pizza parlours: if one tries to charge a much higher price than the others, customers will notice and stop shopping there, and that parlour will have to lower its price.

At least that’s the old Econ 101 logic. CORE puts that at the back of its approach to signify that it’s the special case rather than the norm, says Bowles. Instead, the CORE pedagogy teaches a model where firms sell different goods, and each has at least some power to dictate prices and wages. This choice has implications for more than prices. By eschewing the perfect competition model, CORE introduces the idea that power is a central aspect of market interactions.

CORE includes many other topics that, once, may not have made it even into the back of a textbook, including forced labour and the gender wage gap. Pirate ships of the 18th century are used to explore the role that institutions play in deciding who gets paid how much. The most recent version contains a unit on colonialism and its role in the industrial revolution.

It’s tempting to judge CORE and even Harvard’s Ec10 in ideological terms – as an overdue response or countermeasure to a laissez-faire approach. But the evolution of Econ 101 is about more than politics. (Despite its focus on traditionally more progressive topics, CORE has been criticised for being insufficiently ‘heterodox’, according to Stevens.) By elevating empiricism and by teaching multiple models of the economy, students in these new curriculums are learning how social sciences actually work.

‘A model is just an allegory,’ says the economist David Autor in his intermediate microeconomics course at MIT. For decades, Econ 101 taught one major allegory, in which markets worked well of their own accord, and buyers and sellers all emerged better off. Government, when it was mentioned at all, was frequently portrayed as an overzealous maintenance man – able to solve some problems but also meddling in markets that were fine on their own.

That is not how most contemporary economists think. Instead, they see the competitive market as one model among many. ‘The multiplicity of models is economics’ strength,’ writes the Harvard economist Dani Rodrik in Economics Rules (2015). ‘(W)e have a menu to choose from and need an empirical method for making that choice.’ As the Econ 101 curriculum catches up, economics students are finally getting a taste of the variety that the field has to offer.

As much of an improvement as the new curriculums are, they raise a puzzle. The traditional Econ 101 course was, for all its flaws, coherent and memorable. Students came away with a clear framework for thinking about the world. What does the new Econ 101 leave students with, other than an appreciation that the world is complicated, and that data is important?

Carlin’s answer is that ‘the workhorse (of Econ 101) is that actors make decisions.’ Modelling those decisions remains a central part of economics. What’s changed is the way decision-makers are represented: they can be selfish, but they can also be altruistic. They can be rational, but they can also be biased or blinkered. They are social and strategic, and they interact with one another not just with the faceless market. Models help approximate the most salient features of these interactions, and students learn several different ones to guide their understanding. They also learn that models must fit the facts, and that a crucial part of economics is leaving the armchair and observing what is going on in the world.

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