101 or Not 101- Uber Knows?
from Peter Radford
Paul Krugman has this in his blog today:
The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.
My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.
So why is 101 what it is?
A significant number of student’s exposure to economics is through Econ 101. only. They never intend to become economists, they simply want to learn something about the economy. Yet, as Krugman admits, 101 is full of hypothetical purity about markets. It isn’t a representation of actual economies. It is a distorted and ideologically driven account of what markets might be under conditions so remote from reality that we can dismiss the whole thing as absurd. No one can learn about the actual economy from sitting through Econ 101.
Why do economists insist on creating this stalking horse called a ‘perfect market’ only to bash it as ridiculous later on? Why not begin with something more attached to the real markets students are likely to encounter? And why do they bash it in classes that only future economists attend? Is this some secret plot to ensure intellectual superiority over the naive souls who fell for the misleading nonsense in 101?
Even when 101 is right – according to Krugman – it needs to be set aside as often irrelevant.
His own area of trade is a good example. The notion competitive advantage gets lot of air time. Economists love talking about it because it is not self-evident and thus it makes them look smart for having it in their arsenal, but it only makes sense in the context of a few other ideas. Like the one where displaced workers will find new jobs instantly and so the benefits of trade are unhampered by the cost of lost jobs. Sure. Tell me another one. One simple model can look very clever, but those darned interconnections make things murky very quickly. Which is why most economics ought to be taught in the context of reality.
Which, more often than not, Econ 101 is not. How could it be? It’s mostly a plan attempt to indoctrinate students into believing a particular perspective: that governments are bad and that markets must be ‘free’.
I read that the CEO of Uber repeats a favorite line when asked how his business model is so financial successful: “It’s just Econ 101” he keeps saying. Which is tantamount to saying it’s a fairy tale. Investors beware! Especially when, as someone has now pointed out, that if Uber drivers are all independent contractors, and not employees, ought they not then compete on price and not collude by using Uber’s pricing platform? Uber, it turns out, is one of those exceptions to Econ 101 that one learns about later on after the indoctrination. Uber is actually a massive price-rigging scheme by a whole bunch of independent drivers, and the Uber CEO is acting to encourage the collusion.
Such are the lessons of Econ 101?