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Paul Krugman often makes claims like something to the effect that nobody understands liquidity traps—expressing frustration with the views of his fellow economists. But liquidity traps are a fairly esoteric issue. Why is there so little outrage that nobody understands supply and demand?

Marcus Nunes has a new post pointing to the latest atrocity, in the WSJ:

Oil’s Plunge Could Help Send Its Price Back Up If something is cheaper, people will likely buy more of it. That core principle of economics is proving to be especially true with oil after its recent plunge.

The first two sentences of the article are breathtakingly wrong. It would be easy to mock the particular reporter who wrote this piece, but let’s face it:

1. The WSJ hires people from top universities, who probably got As in economics.

2. Just a few days ago I did a post on Nobel Prize winner Robert Shiller doing the exact same thing.

Non-economists don’t know this, but economics instructors in the lunchroom will often sort of roll their eyes at the fact that students are unable to distinguish between shifts in demand and shifts in quantity demanded. Thus student essays will sometimes say “price fell, so demand rose, so price went up, so demand fell, so price went down . . . ” in an endless circle.

Yes, it’s easy to mock those who know less that we do. But when even high-level academics, pundits and reporters are making what is essentially the exact same error we accuse the students of making, then something is clearly wrong.

I’ve always thought that we teach economics the wrong way. In the intro chapter to supply and demand we have all these stupid examples of a frost hitting the orange crop in Florida, reducing supply and driving up prices. Or heavy demand for Super Bowl tickets driving up prices. Actually, this is the sort of stuff students already know before taking economics. And it’s exactly what they know after taking economics. I firmly believe that the value added of the supply and demand chapter in most textbooks is zero. Students know no more S&D a year after taking the course then they knew going in. Maybe that’s inevitable, maybe supply and demand, like quantum mechanics, is simply too hard for most people.

But I’m not convinced. QM is too hard for me, but I do understand supply and demand. Maybe textbooks should reorient their coverage of the supply and demand chapter, putting less emphasis on the stuff that students already know going in and focusing far more heavily on the identification problem. A good start would be to include 5 examples of experts reasoning from a price change, so you could tell the students, “if you learn this stuff you be smarter than Nobel Prize winners in economics.” Young people love the idea that they are smarter that old people. They love challenges.

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This entry was posted on February 23rd, 2015 and is filed under Misc.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



