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Abstract
Mainstream textbooks present economics as an objective science free from value judgements; that settles disputes by testing hypotheses; that applies a pre-determined body of principles; and contains policy prescriptions supported by a consensus of professional opinion. The Economics Anti-Textbook argues that this is a myth - one which is not only dangerously misleading but also bland and boring. It challenges the mainstream textbooks' assumptions, arguments, models and evidence. It puts the controversy and excitement back into economics to reveal a fascinating and a vibrant field of study - one which is more an 'art of persuasion' than it is a science.
The Economics Anti-Textbook's chapters parallel the major topics in the typical text, beginning with a boiled-down account of them before presenting an analysis and critique. Drawing on the work of leading economists, the Anti-Textbook lays bare the blind spots in the texts and their sins of omission and commission. It shows where hidden value judgements are made and when contrary evidence is ignored. It shows the claims made without any evidence and the alternative theories that aren't mentioned. It shows the importance of power, social context and legal framework.
The Economics Anti-Textbook is the students' guide to decoding the textbooks and shows how real economics is much more interesting than most economists are willing to let on.
Rod Hill has taught at the University of Windsor, University of Regina and the University of New Brunswick, where he has been a Professor of Economics since 2003. He's a member of Economists for Peace and Security and the Progressive Economics Forum.
Tony Myatt has taught at McMaster University, Western University, Nipissing University College, the University of Toronto, and the University of New Brunswick, where he has been Professor of Economics since 1992. He has developed several different introductory courses as vehicles for teaching principles of economics, including Economics of Everyday Life, Economics in the Real World, and Economics Through Film. Professor Myatt was the recipient of UNB's Arts Faculty Award for Excellence in Teaching in 2008.
'Every honest economics teacher absolutely must make this book a compulsory reading for their students.'
Samir Amin, United Nations African Institute for Planning
'What humankind needs second most (first is a cure for global warming), is a means of defusing the lethal ideological superstitions implanted in the educated masses by Samuelson/Mankiw type economics textbooks. Hill and Myatt’s "anti-textbook" goes a long way toward providing it.'
Edward Fullbrook
'I highly recommend Hill and Myatt’s "anti-textbook." It is not so much an outright rejection of traditional treatments of introductory microeconomics as it is an exercise in laying bare the premises on which they are based and then suggesting alternative assumptions and methodologies. This approach leaves the student with a much deeper understanding of economic theory and it shows our discipline for what it truly is: an ongoing conversation among competing paradigms. I urge instructors to amend their courses so that time can be made for this important critique.'
John. T. Harvey, author of Currencies, Capital Flows and Crises
'Hill and Myatt's timely book should be compulsory reading for every student of economics.'
Alan Freeman, UK Association for Heterodox Economics
'Rod Hill and Tony Myatt have written one of the best critical texts of neoclassical microeconomics that I have ever seen. It is a great text to assign along with an introductory or intermediate microeconomics text.'
Frederic S. Lee, American Journal of Economics and Sociology
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| About the authors | i | ||
| List of tables\r | vi | ||
| List of figures\r | vi | ||
| Acknowledgements | ix | ||
| Introduction: our goals, audience and principal themes | 1 | ||
| In brief | 1 | ||
| The structure | 2 | ||
| Our thesis | 2 | ||
| The world-view of mainstream textbooks | 4 | ||
| What’s wrong with this world-view? | 5 | ||
| The textbooks and the Anti-Textbook | 7 | ||
| Suggestions for further reading | 7 | ||
| 1 | What is economics? Where you start influences where you go | 9 | ||
| 1 The standard text | 9 | ||
| 1.1 Economics is the science of choice | 9 | ||
| 1.2 Scarcity | 10 | ||
| 1.3 Opportunity cost | 10 | ||
| 1.4 Marginal thinking: costs and benefits | 10 | ||
| figure 1.1 Marginal thinking | 11 | ||
| 1.5 Rational and self-interested individuals | 12 | ||
| 1.6 Markets are usually a good way to organize economic activity | 12 | ||
| 1.7 Governments can sometimes improve market outcomes | 13 | ||
| 1.8 Another government role: providing equity | 13 | ||
| 1.9 The efficiency–equity trade-off | 14 | ||
| 1.10 A word on methodology | 14 | ||
| 2 The anti-text | 15 | ||
| 2.1 The inherent tension with macroeconomics | 15 | ||
| 2.2 Scarcity and unlimited wants | 15 | ||
| 2.3 The individual versus the community | 17 | ||
| 2.4 The individual versus the corporation | 18 | ||
| 2.5 The trade-off between efficiency and equity reconsidered | 20 | ||
| 2.6 Reconsidering the assumption of rationality | 21 | ||
| 2.7 Behavioural economics | 23 | ||
| 2.8 Concluding comment | 25 | ||
| Suggestions for further reading | 26 | ||
| 2 | Introducing economic models | 27 | ||
| 1 The standard text | 27 | ||
| 1.1 Model building and model testing | 27 | ||
| 1.2 Examples of economic models | 27 | ||
| table 2.1 Labour’s productivity in England and Canada | 28 | ||
| figure 2.1 Wheat and cloth production in England and Canada | 29 | ||
| table 2.2 Changes in world output | 30 | ||
| figure 2.2 Expanded consumption possibilities | 30 | ||
| 1.3 Positive and normative economics | 31 | ||
| 2 The anti-text | 31 | ||
| 2.1 Textbooks fudge their own methodology | 31 | ||
| 2.2 Predictive power isn’t all it is cracked up to be | 32 | ||
| table 2.3 Percent in agreement with the proposition: ‘minimum wages increase unemployment among young and unskilled workers’ | 33 | ||
| 2.3 Core propositions are incapable of refutation | 35 | ||
| 2.4 Economics is the art of rhetoric | 36 | ||
| 2.5 Paradigms and ideology | 40 | ||
| figure 2.3 Different perceptions of reality | 41 | ||
| 2.6 Evaluating comparative advantage | 43 | ||
| Suggestions for further reading | 45 | ||
| 3 | How markets work (in an imaginary world) | 46 | ||
| 1 The standard text | 46 | ||
| 1.1 What is a competitive market? | 46 | ||
| 1.2 The demand curve | 46 | ||
| figure 3.1 Inelastic and elastic demand | 47 | ||
| 1.3 The supply curve | 47 | ||
| figure 3.2 Movement towards equilibrium | 48 | ||
| 1.4 Market equilibrium | 48 | ||
| 1.5 Comparative static analysis | 48 | ||
| figure 3.3 Comparative static analysis | 49 | ||
| 1.6 A government-regulated price ceiling: rent controls | 49 | ||
| figure 3.4 The effect of rent control | 50 | ||
| 1.7 A government-regulated price floor: minimum wages | 50 | ||
| figure 3.5 The effect of a minimum wage | 51 | ||
| 1.8 Who bears the cost of sales taxes? | 51 | ||
| figure 3.6 The incidence of taxation | 52 | ||
| 1.9 The costs of taxation | 52 | ||
| 2 The anti-text | 53 | ||
| 2.1 The demand and supply model is sold as a generic tool | 53 | ||
| 2.2 How many markets are perfectly competitive? | 54 | ||
| table 3.1 Types of market structure | 54 | ||
| 2.3 Is the competitive model a useful approximation? | 57 | ||
| table 3.2 Tax incidence applications used in ten major North American textbooks | 61 | ||
| 2.4 But don’t price floors cause surpluses and price ceilings shortages? | 62 | ||
| 2.5 What the texts don’t tell you about the competitive model | 64 | ||
| figure 3.7 Multiple equilibria in the labour market | 66 | ||
| figure 3.8 Self-fulfilling prophecies | 68 | ||
| 2.6 Summing up | 71 | ||
| Suggestions for further reading | 72 | ||
| Addendum: the indeterminate and unstable economy | 72 | ||
| 4 | People as consumers | 74 | ||
| 1 The standard text | 74 | ||
| table 4.1 Mary’s benefit from eating pizzas | 75 | ||
| table 5.1 Inputs and output in the short run (using 10 units of capital) | 94 | ||
| figure 4.1 Marginal benefit and price | 76 | ||
| figure 4.2 Market demand | 77 | ||
| figure 4.3 Happiness in the United States, 1994–96, by income decile | 88 | ||
| figure 4.4 Happiness and per capita income across countries, 1999–2004 | 89 | ||
| figure 4.5 Happiness in the United States, 1946–2008 | 90 | ||
| 2 The anti-text | 78 | ||
| 2.1 What if preferences are not ‘given’? | 78 | ||
| 2.2 Incomplete and asymmetric information | 83 | ||
| 2.3 Preferences and relative position | 87 | ||
| figure 4.3 Happiness in the United States | 88 | ||
| figure 4.4 Happiness and per capita income across countries | 89 | ||
| figure 4.5 Happiness in the United States | 90 | ||
| 2.4 Summing up | 91 | ||
| Suggestions for further reading | 92 | ||
| 5 | The firm | 93 | ||
| 1 The standard text | 93 | ||
| table 5.1 Inputs and output in the short run | 94 | ||
| figure 5.1 The law of diminishing marginal returns | 95 | ||
| table 5.2 Costs in the short run | 95 | ||
| figure 5.2 Marginal and average costs | 96 | ||
| figure 5.3 Marginal product and marginal cost | 96 | ||
| figure 5.4 Marginal benefit and market price | 97 | ||
| figure 5.5 Long-run average cost relationships | 99 | ||
| figure 5.6 The long-run equilibrium for the competitive firm | 100 | ||
| table 5.3 Downward-sloping demand and marginal revenue | 100 | ||
| figure 5.7 Relationship between demand and marginal revenue | 101 | ||
| 2 The anti-text | 101 | ||
| 2.1 What do firms’ costs actually look like? | 102 | ||
| figure 5.8 Short-run marginal costs | 103 | ||
| figure 5.9 Long-run average cost with increasing and then constant returns to scale | 105 | ||
| figure 5.10 Why the competitive firm should raise its price above the market price | 108 | ||
| 2.2 The equilibrium of the perfectly competitive firm, re-examined | 107 | ||
| figure 5.10 Why the competitive firm should raise its price abovethe market price | 108 | ||
| 2.3 Shaping the external environment: using power for profit | 108 | ||
| 2.4 Power within the firm | 114 | ||
| 2.5 Summing up: the firm in the textbook and the firm in reality | 117 | ||
| Suggestions for further reading | 117 | ||
| figure 5.2 Marginal and averagec osts | 96 | ||
| 6 | Market structure and efficiency – or why perfect competition isn’t so perfect after all | 118 | ||
| 1 The standard text | 118 | ||
| 1.1 Types of market structure | 118 | ||
| 1.2 Perfect competition | 118 | ||
| figure 6.1 Derivation of the competitive firm’s supply curve | 119 | ||
| figure 6.2 The short-run response to an increase in demand | 120 | ||
| figure 6.3 The long-run response to an increase in demand | 121 | ||
| figure 6.4 The optimal quantity | 122 | ||
| figure 6.6 Monopoly versus perfect competition | 124 | ||
| 1.3 Non-competitive markets: there is no supply curve | 122 | ||
| figure 6.5 Non-competitive firms don’t have a supply curve | 123 | ||
| 1.4 Monopoly | 123 | ||
| figure 6.7 Price ceilings and monopoly | 126 | ||
| figure 6.8 Natural monopoly | 126 | ||
| 1.5 Other market structures | 127 | ||
| figure 6.9 Monopolistic competition | 128 | ||
| table 6.1 A pay-off matrix illustrating the prisoner’s dilemma | 129 | ||
| table 6.2 Repeated plays when Esso plays ‘tit-for-tat’ | 130 | ||
| 2 The anti-text | 130 | ||
| 2.1 Can something be ideal if it is not equitable? | 131 | ||
| 2.2 Static efficiency is less important than dynamic efficiency | 132 | ||
| 2.3 Perfect competition is flawed even as a standard of static efficiency | 135 | ||
| 2.4 The textbooks concede the point | 138 | ||
| 2.5 Evidence, please! | 138 | ||
| figure 6.10 Estimating the deadweight loss | 139 | ||
| 2.6 The omitted legal framework | 140 | ||
| 2.7 Conclusion | 144 | ||
| Suggestions for further reading | 145 | ||
| Addendum: what about the efficiency of asset markets? | 145 | ||
| The efficient market hypothesis (EMH) | 145 | ||
| The efficient market hypothesis and the behavioural economists | 146 | ||
| figure 6.11 Aggregate stock price bubbles | 147 | ||
| Cycles of boom and bust | 148 | ||
| Micro near-efficiency and macro inefficiency | 148 | ||
| 7 | Externalities and the ubiquity of market failure | 150 | ||
| 1 The standard text | 150 | ||
| figure 7.1 Markets are inefficient in the presence of externalities | 151 | ||
| table 7.1 Classification of types of goods | 153 | ||
| 2 The anti-text | 153 | ||
| 2.1 Externalities in reality | 154 | ||
| table 7.2 Percentage changes in age-standardized cancer incidence rates | 163 | ||
| figure 7.2 Cancer incidence per 100,000 males, age-standardized rates | 164 | ||
| figure 7.3 Cancer incidence per 100,000 females, age-standardized rates | 165 | ||
| 2.2 Externalities and the profit motive | 166 | ||
| 2.3 Summing up: externalities and the market economy | 167 | ||
| Suggestions for further reading | 168 | ||
| 8 | The marginal productivity theory of income distribution – or you’re worth what you can get | 169 | ||
| 1 The standard text | 169 | ||
| 1.1 Introduction | 169 | ||
| 1.2 Demand for factors of production | 170 | ||
| 1.3 Determination of wages in a perfectly competitive labour market | 171 | ||
| figure 8.1 Competitive determination of the wage of welders | 171 | ||
| 1.4 Wage differentials in competitive labour markets | 172 | ||
| figure 8.2 Two types of unions in otherwise competitive markets | 173 | ||
| 1.5 Monopsonistic labour markets | 175 | ||
| table 8.1 Marginal cost of labour for a monopsonist | 175 | ||
| figure 8.3 Monopsony in the labour market | 176 | ||
| figure 8.4 Monopsony with minimum wage | 176 | ||
| 1.6 The returns to capital | 177 | ||
| figure 8.5 The adding-up problem | 178 | ||
| figure 8.6 Reswitching produces the possibility of multiple equilibria | 182 | ||
| 2 The anti-text | 178 | ||
| 2.1 Does marginal productivity legitimize the actual distribution of income? | 179 | ||
| 2.2 Theoretical problems with the standard textbook story | 180 | ||
| figure 8.6 Reswitching produces thepossibility of multiple equilibria | 182 | ||
| 2.3 The fuzziness of marginal productivity theory | 183 | ||
| 2.4 Empirical testing of the competitive model | 184 | ||
| 2.5 The importance of fairness and status | 185 | ||
| 2.6 The monopsony model of the labour market | 187 | ||
| figure 8.7 Derivation of a competitive firm’s upward-sloping supply of labour schedule | 188 | ||
| 2.7 CEO and management compensation | 190 | ||
| figure 8.8 Average executive pay relative to average wages in the USA | 191 | ||
| figure 8.9 Dow Jones Industrial Average and CEO pay relative to average pay, 1970–2002 | 192 | ||
| figure 8.9 Dow Jones Industrial Average and CEO pay relative to average pay | 192 | ||
| 2.8 Concluding comments | 194 | ||
| Suggestions for further reading | 194 | ||
| 9 | Government, taxation and the (re)distributionof income: is a just society just too expensive? | 196 | ||
| 1 The standard text | 196 | ||
| 1.1 The costs of taxation | 196 | ||
| 1.2 Taxes: an international comparison | 197 | ||
| table 9.1 Taxation as a percentage of GDP, OECD countries, 2005 | 197 | ||
| 1.3 The distribution of income and wealth | 198 | ||
| figure 9.1 The Lorenz curve | 198 | ||
| table 9.2 Measures of income inequality | 199 | ||
| table 9.3 Distribution of household net worth | 200 | ||
| 1.4 Poverty | 201 | ||
| table 9.4 Percentage of children in households with less than half of median household income, circa 2000 | 202 | ||
| 1.5 Income redistribution | 202 | ||
| figure 9.2 The equity–efficiency trade-off | 203 | ||
| 2 The anti-text | 203 | ||
| 2.1 The subtle bias against government and against redistribution | 204 | ||
| figure 9.3 Income distribution and equality | 206 | ||
| 2.2 The equity–efficiency trade-off, reconsidered | 208 | ||
| figure 9.4 The equity–growth trade-off | 212 | ||
| 2.3 The pervasive costs of inequality | 213 | ||
| figure 9.5 Relative risk of CHD death excluding other risk factors | 214 | ||
| figure 9.6 The social gradient of health | 215 | ||
| 2.4 Summing up | 218 | ||
| Suggestions for further reading | 218 | ||
| 10 | Trade and globalization without the rose-tinted glasses | 219 | ||
| 1 The standard text | 219 | ||
| 1.1 The extent and growth of international trade | 219 | ||
| 1.2 The economics of tariffs and import protection | 219 | ||
| table 10.1 International trade, 2007 | 220 | ||
| figure 10.1 The effects of a tariff | 221 | ||
| 1.3 The argument for free trade | 221 | ||
| 1.4 Arguments for protecting domestic production against foreign imports | 222 | ||
| 1.5 Illegitimate arguments for protection | 223 | ||
| 1.6 The global trading system | 224 | ||
| 2 The anti-text | 224 | ||
| 2.1 Problems with the textbook model | 225 | ||
| 2.2 Relaxing the textbook’s assumptions | 227 | ||
| figure 10.2 Average costs of producing nails in two countries | 230 | ||
| 2.3 What’s missing from the textbooks | 231 | ||
| table 10.2 Estimates of the stock of foreign direct investment, by sector, 2006 | 239 | ||
| 2.4 Summing up | 241 | ||
| Suggestions for further reading | 241 | ||
| 11 | Conclusion | 243 | ||
| The distinction between positive and normative economics | 243 | ||
| The rational individual | 244 | ||
| table 11.1 Conventional economics and the blank cells of Akerlof and Shiller | 244 | ||
| The goals of equity and efficiency | 245 | ||
| The assumption that more is better | 246 | ||
| Methodological problems | 246 | ||
| Overemphasis on perfectly competitive markets | 247 | ||
| Textbooks ignore their own ideological leanings | 248 | ||
| The central idea that smaller government is better | 249 | ||
| Downplaying the importance of the legal framework within which markets operate | 249 | ||
| table 11.2 Conventional textbook economics and the blank cells of Robert Prasch | 250 | ||
| The omission of power | 251 | ||
| The presumption in favour of free trade | 251 | ||
| The omission of community | 251 | ||
| Downplaying the ecological crisis facing the planet today | 253 | ||
| Critical thinking about economics | 254 | ||
| Suggestions for further reading | 255 | ||
| Postscript: a case study on the global financialmeltdown | 256 | ||
| The importance of imperfect and asymmetric information | 256 | ||
| The role of externalities | 257 | ||
| Limited rationality | 258 | ||
| Interest rates aren’t always at their market clearing level | 258 | ||
| The importance of the regulatory framework and the impact of deregulation | 259 | ||
| Deregulation or evolution? | 261 | ||
| Why did this happen? | 262 | ||
| Suggestions for further reading | 263 | ||
| Notes | 264 | ||
| to Introduction, chapters 1 and 2 | 264 | ||
| to chapter 3 | 265 | ||
| to chapter 4 | 266 | ||
| to chapters 5 and 6 | 267 | ||
| to chapters 7 and 8 | 269 | ||
| to chapter 9 | 270 | ||
| to chapter 10 | 271 | ||
| to chapter 11 and Postscript | 272 | ||
| Bibliography | 274 | ||
| Glossary | 291 | ||
| Index | 297 |