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Thursday, September 1, 2016

6 Things Your Harvard Economics Textbook Won’t Tell You

What the most commonly used book for teaching economic principles leaves out.

If you are taking Econ 101 this fall, you will likely encounter Principles of Economics, Gregory Mankiw’s best-selling college text, now in its 7th edition. Professor Mankiw is the Chair of the Department of Economics at Harvard University, and he served as chairman of the Council of Economic Advisers under President George W. Bush.

Economics is fundamentally the study of human behavior whenever choice is involved. The book is a dramatic improvement over many previous best sellers, such as Paul Samuelson’s textbook (for decades, it predicted Soviet production would exceed the US). Mankiw provides a solid presentation of technical topics to prepare students for future study. However, it is weak in an area where it should be strongest: foundational principles that constitute the very core of the economic way of thinking.

The omission of these six essential concepts does real disservice to students hoping to make better economic decisions.

1. Only individuals choose, and only individuals act.

Professor Mankiw introduces economics as “the study of how society manages its scarce resources.” This definition treats economics as the science of engineering collectivist solutions to technical resource allocation problems. In doing so, he leaves out much of what makes the study of economics so rich.

Economics is fundamentally the study of human behavior whenever choice is involved. Only individual people make decisions, and only individual people act on those decisions. In bypassing the underlying principle that economics is rooted in individual choice, the Mankiw text misses an opportunity to make the study of economics personally relevant to students. Few students will go on to plot another demand curve, but everyone benefits from having a toolkit for making better decisions in business, politics, and life. Economics is especially valuable when taught as a set of tools for better understanding the choices real people face and the decisions they make.

2. Economic value is subjective.

What’s more valuable: College football tickets or a textbook? An undergraduate student in Cambridge might have little interest in football and prefer spending money on an economics principles textbook so she can pass her class. I prefer spending money on tickets to The Game this fall for a novel experience. The economic resources we value are only valuable to us as part of our plan to satisfy some goal relative to available alternatives. In short, value is in the eye of the beholder.

Or, in other words, economic value is subjective. Unfortunately, the Mankiw text does not provide any explanation of economic value. Instead, it immediately jumps to treating economics as a resource allocation problem to be solved by smart economists.

Mankiw is careful to explain that economists may disagree about how resources should be distributed, but he entirely ignores the notion that resources only have value to a person based on his or her unique thoughts and plans at a point of time amidst ever-changing circumstance. One can see how students might think economics is indeed the “dismal science” when the most human components are omitted.

3.  Knowledge Problem

No person or group of people can possibly have sufficient knowledge to make a pencil, much less plan the actions of millions of people; each with their own unique, subjective valuations of resources in a world that is constantly changing. The knowledge of the resources most urgently needed to meet the needs of people is dispersed in tiny, localized bits throughout an economy. This knowledge is always and constantly changing in response to changing circumstances.

Nobel laureate F.A. Hayek emphasized how it is quite literally impossible for a central authority to collect, aggregate, and use this kind of situational knowledge to effectively plan and engineer society. One of the first lessons for a student studying the social sciences should be to differentiate actual knowledge from what Hayek called the mere pretense of knowledge. The practical advantages that stem from genuine humility in acknowledging the limits of human reason is a beautiful insight.

Sadly, this insight does not once appear in the Principles of Economics text.

4. The Seen and Unseen

Good economists must look at both the seen and the unseen. People are keen to notice results that are easily seen. When a government stimulus program creates a job, we see a man and his shovel. Fewer people ever become aware of the unseen effects of such policies. As resources are diverted to government programs, alternative wealth-creating jobs never come into existence. Policies not only produce immediate, direct impacts on identifiable groups but also have long-term effects on less visible groups.

French economist Frédéric Bastiat taught one of the simplest yet most profound lessons in all of economics: Good economists must look at both the seen and the unseen. You may think this all sounds obvious, but the persistence of popular arguments for everything from $15 minimum wage, to welfare state policies, to government stimulus suggests otherwise. Henry Hazlitt thought Bastiat’s insight was so important for combating popular economic fallacies he made it the central theme of his book, Economics in One Lesson. Unfortunately, this lesson remains unseen in the Harvard text.

5. Entrepreneurship

The real world is dynamic and changing. Not mentioned once in this 880-page introduction to the principles of economics are the words “entrepreneurship” or “entrepreneur”. Economic value creation is a process, and the entrepreneur plays a key role in this process. Entrepreneurs create wealth by moving resources into more productive uses. They do this by innovating new products or processes to replace old ones and by discovering unnoticed opportunities to profit and acting on those opportunities.

Channeling Israel Kirzner’s conception of entrepreneurship Steven Horwitz explains, “Entrepreneurship is about seeing possibilities not given by the data. It is the act of seeing a new means-ends framework rather than optimizing based on a given one.” The real world is dynamic and changing. Regrettably, there is no room for explaining the role of entrepreneurial value creation in a textbook that treats existing wealth as a given and points to allocation and distribution as economists’ primary concerns.

6. Government actors are not angels.

Entire sections of Mankiw’s text are devoted to explaining market failure. He is quick to offer how governments can theoretically improve market outcomes. Mankiw explains, “…tension between market success and market failure is central in microeconomics.” Additionally, Professor Mankiw peppers anti-market sentiments throughout the text with comments such as, “…asymmetric information gives us new reason to be wary of markets.”

However, there is little more than a brief paragraph in the first chapter that warns about the possibility of government failure. Government intervention in the market often makes things worse than before; where the cure is somehow worse than the disease. James Buchanan, Gordon Tullock, and others have taught us to analyze politics without romance by using the economic lens to observe how public policy works in the real world.This useful framework for future policy advisers is absent from Mankiw’s college textbook.

Beyond Ivy League Education

Mark Twain once quipped, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” In the case of economics, it’s both.

According to the Council for Economic Education, 42% of high school graduates never take a course in economics. Only 3.3% of colleges list basic economics as a requirement. It is a shame millions of American students are never exposed to the economic way of thinking during their years of formal education.

If the absence of economics from high school and college curricula gives us cause for worry, we should be even more concerned that the essential economic concepts listed above are never taught in most economics classes. Students who do study economics in college, and especially those studying from the Harvard textbook, will likely learn about the tools economists use to advise policy.

Few will properly learn the difference between when these tools are useful and when they are counterproductive. When humility in the face of constrained knowledge is not taught, we risk cultivating a group of smart people who are eager to inadvertently engineer planned chaos.

Today’s policy makers are yesterday’s students. Those who fancy themselves able to forecast the future and use aggregate statistics to manage and plan the economy set the stage for economic mischief. The ideas of economists are more powerful than is commonly understood – and not just because of the ideas that are taught. Often, it is what is omitted by intellectual influencers that shapes the conversation.

Do not dismay. Even if you are a student who has been relegated to learning economics from a Harvard textbook, you can still learn what makes the study of economics so rich at

  • Jason Riddle was the Vice President of Programs and Strategic Operations at FEE. Prior to joining FEE, Jason spent over eight years as a management consultant working with a variety of public and private organizations to enhance their business performance through improved risk management, operational effectiveness, and control around internal and external reporting.