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Book Review
December 2023

Reflections on introductory economics education and its consequences

Economism: Bad Economics and the Rise of Inequality. By James Kwak. New York City, NY: Pantheon Books, 2017, 237 pp., $25.95 hardcover.

While economics courses can take many approaches to pedagogy, one guarantee is a graph—a graph with price on one axis, quantity on the other. Contained therein are two lines, one indicating demand, and the other, supply. What some users of this ubiquitous model often forget is that this graph is meant to introduce ideas about the behavior of perfectly competitive markets, and these ideas come with many assumptions that do not fully reflect reality. This overuse of the model is what leads James Kwak, the author of Economism: Bad Economics and the Rise of Inequality, to assert that a blind adherence to the simplest of the laws of supply and demand has done a great deal of economic harm, both in terms of allocation of resources and with respect to the welfare of many poor, working people.

Kwak defines the book’s titular term, economism, as “what you are left with if you learn the first-year models, forget that there are assumptions involved, and never get your hands dirty with real-world data.” Throughout the nine chapters of the book, the author introduces readers to the problems plaguing the introductory model of supply and demand, illustrating them with real-world accounts of market failure in fields such as healthcare, finance, and trade. He begins with a “crash course” in introductory economic theory, providing readers with the information necessary for interpreting the perfectly competitive market model. He then dissects the effects of supply and demand shifts on perfectly competitive markets and introduces the ideas of market equilibrium and dead-weight loss. This discussion is followed by a history of how such models gained prevalence, as well as an account of the key actors involved in that process, including Friedrich Hayek, Milton Friedman, and Ludwig von Mises. Kwak is not only foreshadowing the consequences of economism but also exposing how a full contextualization of the theory is what is sorely missing from introductory economics education.

Early in the book, Kwak uses history to begin to unwind the model of perfectly competitive markets, but it is in subsequent chapters that he solidifies his thesis. These chapters begin by looking into the minimum wage, salaries and benefits given to corporate executives, and the disparity between wages and productivity. The discussion on the minimum wage starts by introducing various views on the concept of a price floor, including those of economists such as Mises and Hayek. These views—portrayed as representing economism—are then contrasted with economic research that studies how the minimum wage affects employment. Arguments of this variety are then assessed with respect to chief executive officer compensation packages, as well as the incentives, or lack thereof, such packages create. The section on wages concludes with a discussion of how worker wages have failed to keep pace with the accompanying steady rise in productivity over the previous few decades.

Economism is then discussed in the context of healthcare in the United States, with Kwak explaining how arguments based on the model of perfectly competitive markets fail to accurately describe that domain. The author attributes this failure to two main causes: the existence of an insurance apparatus that ensures that medical services are seldom paid for directly by those receiving healthcare and the fact that most people do not need healthcare on an ongoing basis. Distortions are then amplified, Kwak claims, by a series of policy choices over the years that have failed to reflect best practices gleaned from either research or the experiences of other countries within the Organisation for Economic Co-operation and Development. As always, the topic of healthcare is complex, but Kwak weaves through it with an appropriately critical lens.

Kwak’s best is revealed in a chapter concerning economism in the financial sector. The author’s expertise in banking and financial regulation helps inform his discussion of the effects of markets in finance. Special attention is paid to developing arguments against economism and expanding upon the 2008 financial crisis. Although the crisis was a complicated affair, Kwak dissects it efficiently, adding the history of how it came to pass. He spends considerable time describing how the logic of economism was used to deregulate the banking sector in order to create new risky financial products and how these products then began to be traded among and within banks. He identifies the products and describes how they worked, what led the banks to create them, and, ultimately, how they were the catalyst for the financial crisis itself. This much-needed history could greatly benefit anyone seeking to know more about financial economics.

Moving on from the financial sector, Kwak then looks at trade, getting to the core of an issue that, while uniting nearly all economists, still calls into question the axioms of economism. Although free trade does create wealth, it does not come without costs. Kwak begins this discussion with the simple two-country model of trade covered in introductory economics classes, describing the value of trade when two entities each have a comparative advantage. However, as seen repeatedly in the book, the real-world data do not necessarily reflect introductory theory. Using research on the results of the North American Free Trade Agreement, Kwak argues that while trade has contributed to U.S. economic growth, that contribution has been very small and countered by the loss of many U.S. manufacturing jobs that have been allowed to flow out of the country.

Overall, Kwak makes valid points and backs them up with excellent data and evidence from existing research. Helped by his solid understanding of economics, he is able to dismantle models demanding that everything be decided in a market. These models are useful for the introduction of core concepts, but they rarely hold when one is exposed to further economics education. In introductory courses, buyers and sellers are price takers. In advanced courses, the attention shifts to how firms can decide both prices and output. In introductory trade theory, the two-country model is excellent for illustrating trade’s benefits. However, advanced trade theory considers many countries, goods, and distance costs simultaneously. Although introductory models are excellent for simplifying a dynamic, complex world, Kwak’s argument that dogmatic adherence to them has dire consequences cannot be denied.

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About the Reviewer

Hayden Grace

Hayden Grace is an economist in the Office of Employment and Unemployment Statistics, U.S. Bureau of Labor Statistics.

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