Economics 101: A New Look

When I was a beginning “soft social scientist” around 1950, it was always assumed that there was only one “hard” social science — economics. The reasoning was simple. Economics dealt with real figures and it used mathematics to manipulate these figures. This had been the road to success of the natural sciences and it was assumed it would soon be that of all science. Psychology, political science, and sociology are still struggling with this assumption.

Meanwhile, over in economics, there seems to be something of a revolt. More and more economists are starting to reject dependence on “hard numbers” and on simplistic mathematical formulae. A long article in the New York Times (July 11) refers to some of these revolutionaries and their arguments. As one says, “Economics is often a triumph of theory over fact.” They are starting to notice that open markets and free trade are not always good, that the level playing field is never level, and the players may have quite different goals. They are noting that government regulation is not always bad, particularly when compared with absence of regulation.

Of course, one alternative to mainstream economics has been “behavioral economics”, which is rather closer to sociology. It has been a round for a good while, but seems to be having a renaissance.

I particularly noted that the conversion of some economists to the new thinking was based on studies of the actual effects of the minimum wage. It has been a basis tenet of standard economics that the minimum drives up costs for everyone and puts many people out of work. However, a recent study in New Jersey showed that an increase in the minimum wage actually resulted in a rise in employment. I was struck by this because when I was at the Hudson Institute in the 1960s, an institute heavily infused with the standard economics, I had occasion to look at studies of what happens when minimum wages were imposed or raised. Unlike what our speakers confidently asserted, I could not find a study that supported their opposition to the minimum wage. The vaunted association of minimum wage and unemployment was a good example of a triumph of theory over fact.

All this is becoming increasingly important as we struggle with the demands of globalization. On the one side are those who will profit from it (large corporations and some poor countries especially) and the economic fraternity that treats opponents like biologists treat the critics of evolution. On the other side are those who will clearly suffer in the short term and those who are not attracted to the vision of a thoroughly homogenized world. The economics of globalization needs at least a long hard look that goes far beyond the attractiveness of shifting production to the country with the greatest comparative advantage.

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