Features » November 27, 2006

What We Learn When We Learn Economics (cont’d)

The simple models have an explanatory power that is thrilling. Once you’ve grasped the aggregate supply/aggregate demand model, you understand why stimulating demand may lead, in the short run, to growth, but will also produce inflation. But the content of that understanding turns out to be a bit thin. Inflation happens because, well, that’s where the lines intersect. “A little economics can be a dangerous thing,” a friend working on her Ph.D in public policy at the U. of C. told me. “An intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, individualism, maximizing behavior, etc. But, of course, if you don’t go any further than Econ 101, you won’t know that the textbook models are not the way the world really works, and that there are tons of empirical studies out there that demonstrate this.”

Take, for instance, the minimum wage. In Sanderson’s intro micro class, he uses a simple supply and demand model of a labor market to show why a minimum wage will cause unemployment, and therefore be self-defeating. “Most economists, myself included, are opposed to living wage ordinances and minimum wage laws period,” he says. But a series of empirical studies has established that the most recent increase of minimum wage in 1997 had essentially no impact on unemployment. In fact, in October, 650 economists, including five Nobel Laureates, signed a letter advocating an increase in the U.S. minimum wage to $8 an hour.

Of course, some elision and simplification is unavoidable. Sanderson’s not trying to create future economists, but rather give students “some sort of cultural literacy” about how the economy works. He often starts class by leading us through a kind of Socratic deconstruction of a newspaper article that commits some egregious economic sin. About midway through the semester, during the unit we spend learning about how the gross domestic product is computed, he reads to the class from an article in the Chicago Tribune with the headline, “Corporate Giants Dwarf Many Nations.” The piece compares the annual sales of large corporations like Wal-Mart with that of small countries, like Israel, showing that many of the world’s 200 largest corporations are as large as entire national economies, and therefore have a great deal of political and economic clout. After quoting at length, Sanderson points out how implausible it is that 200 companies, with one third of one percent of the world’s workforce, could produce 28 percent of the world’s economic activity. “There’s a word for it,” Sanderson says. “Two words, actually. The first is ‘Horse.’ “

The problem, Sanderson notes, is that “sales” is a terrible measurement for the economic output of a company like Wal-Mart, because it only produces a very small percentage of the value of any product is sells. When you buy pistachios at Wal-Mart, it’s not like those nuts were grown on a Wal-Mart farm. Wal-Mart bought them from someone and then resold them for a profit. “If we were counting GDP, we just want to count what’s the net contribution, what’s the value added?” he explains. “Last year, worldwide Wal-Mart sold $285 billion worth of goods and services, but paid manufacturers $220.” Sanderson’s point is pretty obvious, if you think about it. And yet the article gets it wrong over and over, which nearly sends Sanderson around the bend. “This happens to be the political rhetoric: ‘These 200 corporations dominate the world.’ They don’t. They’re a very small percentage of GDP,” Sanderson says. “Those who are criticizing very large multinational corporations are doing a disservice if they don’t get the math right.”

This contrarian approach is central to Sanderson’s worldview: It’s the counterintuitive, “everyone-says-x-but-really-what-matters-is-y” formulation that has become the staple of magazines like the New Republic and Slate. (A headline from Slate’s October 14 “Underground Economist” column: “Charity is Selfish.”) But as with any counterintuitive rhetoric, what matters is how you define the conventional “intuition” that you’re skewering. And with Sanderson, the target is almost always statist, regulatory and liberal: The idea that you can, indeed, get a free lunch, by, for instance, mandating better incomes for workers by raising the minimum wage. Thinking of economic policy as a series of trade-offs and opportunity costs and, most importantly, unintended consequences is a hallmark of the Chicago School, and it was a constant theme throughout the course: Whenever you try to alter the market, the market extracts its revenge.

In Sanderson’s zeal to play ‘gotcha’ with the press, he too can slant the pure data. That evening, I went online and found that Wal-Mart’s $65 billion of net revenue was still larger than the GDP of 132 countries, including Bangladesh, which has a population of 144 million people. I wrote an e-mail to Sanderson, who promptly wrote back, saying the bigger point was to drive home the problem with inappropriate comparisons and double counting. “I tried to point out that these apples v. oranges comparisons are all over the place,” he wrote, and added that the double-counting error could be found everywhere from the Wall Street Journal to some introductory textbooks. “Thanks,” he wrote, “for continuing the out-of-class dialogue.”

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Sanderson is so likeable and masterful that the entire quarter goes by with the class eating out of his hand: They take careful notes, class attendance is almost perfect every day and each pre-exam study session is packed. But the final unit of the class is devoted to free trade, and suddenly things change.

Sanderson begins the class by telling us that “in trade, there’s an enormous amount of agreement between economists about what constitutes the truth. The disagreements are between economists and everybody else.” His central contention is that allowing any two given countries to trade their goods freely will necessarily make both countries better off. It’s the same logic, he says, that we use everyday. When you decide to have someone do your dry cleaning or fix your car, you’re deciding to specialize in what you do best, and trade for the other things you need. Specialize and trade: That was Adam Smith’s central insight into the nature of the “wealth of nations,” and, Sanderson says, it remains as true today as it was then.

But when lecturing on trade, Sanderson’s tone is noticeably different. His agenda and ideology are more up front, such that the classes felt for the first time almost–almost–like propaganda. And during these lectures, something incredible happens. The class rebels. Whereas for the duration of the quarter Sanderson had made the students feel as if he was their guide in seeing through the Matrix, suddenly Sanderson morphs from being Laurence Fishburne to the FBI agent in a suit. The class prods and pushes back as if they are being fed spin. As Sanderson talks about the importance of nations specializing in whatever they have a comparative advantage in, a student raises his hand: “Isn’t there a problem if you put all your eggs into one basket, and then if there’s a problem with that sector you’re in trouble?”

That ends that day’s class, but it continues in the next. Sanderson argues that liberalized trade creates more jobs than it destroys. “Free trade creates winners and it also creates losers. It turns out that winners are quantitatively larger than the losers.” A student asks, flat out, “Why are we to believe that?” Sanderson restates his point, but the student holds his ground, saying he’s read that there simply doesn’t exist an accurate measure to figure out how many jobs are being created and destroyed. Sanderson concedes that this is true, but insists it “must” be a net positive.

You can hear papers rustling and side conversations breaking out. Hands begin to shoot up and Sanderson began to sweat noticeably as the mutiny spreads. One student asks about attaching labor or environmental protections to trade deals. Sanderson replies that such stipulations (like requiring workers be paid $14 an hour) simply operate like tariffs, raising the price of goods and “saving jobs in the U.S., union jobs that are relatively high paid, and taking people in developing countries who are not well off and making them poorer. I tend to be against laws that make poor people poorer.”

“OK,” responds the student, who with a beard and long hair looks a bit like the student radical who’s been missing all quarter. “Let’s say the standards are not ridiculous. The workers have a right to organize, or we can’t pollute the only source of the village’s water supply.”

“How do we define what’s ridiculous?,” Sanderson shoots back. “Once you start, it’s very difficult to draw the line, in terms of what workers have. Should other countries not trade with the U.S. because we have capital punishment? Should we not trade with countries that don’t allow abortion? My problem with sweatshops is, quite frankly, the only potential definition is people who work long hours for low wages, and that’s what the U.S. was 120 years ago. A lot of what economics is about is how to increase the world’s income, and not for Bill Gates and Oprah, but for the world’s poor. Unions don’t like trade agreements. They’ve never seen one they like, and they want to find a reason in environmental standards or things like that.”

“We do draw the line every day,” the student responds, not bothering to raise his hand this time. There are hands up all over and the class has now devolved into a free-for-all. “We don’t trade with Burma. We didn’t trade with Iraq. We do trade with Saudi Arabia. It’s not impossible to re-imagine how to draw the line.” Sanderson is not winning this argument. “These are tough issues,” he says, and the class ends.

It occurs to me that Sanderson’s problem is that he’s been too honest about his biases. It’s far more effective to communicate a worldview through subtext than to argue for it explicitly. For eight weeks, Sanderson had been the model of equanimity, the centrist arbiter of competing factions, and because of this students seemed to accept his word without question. But on the very first day of class he’d tipped his hand that he was an “ardent free-trader,” and his clear desire to have students come away believing, as he does, in the benefits of free trade, was backfiring.

By the next class, Sanderson has regrouped, and calmly and methodically leads the class through a Socratic dialogue. Tobacco farmers have lost their jobs because we smoke less: Does that mean we should have the government do something about it? People lose their jobs all the time because the work they do–whether opening envelopes for magazine subscriptions or wrapping Hershey’s Kisses–becomes automated. Trade works the same way as technological progress: While it might put some people out of work, in the end, it makes everyone better off. The class is nodding, attentive and silent.

Furthermore, free trade is a moral imperative because it makes poorer countries better off. “I don’t want to sound like Miss America,” Sanderson says as he wraps up the final class of the quarter. “I think world poverty is where it’s at in terms of where you try to place resources. My sense is that significant redistribution of wealth is probably not the answer. Part of it is that there is not enough wealth to redistribute. There’s not a lot of rich people and too many poor people. And the gap between rich and poor is too vast. It comes down to economic growth, how fast we can make economies grow. Economic growth does tend to raise all boats.”

As the class files out, I see a student I’d talked with a few times over the course of the quarter, an unassuming kid with a long mop of brown hair. I remember a conversation we’d had at the beginning of the semester: “I hope it doesn’t all end up to be wrong,” he’d said, referring to the Chicago School theories he was about to learn. “Like in Latin America. That worries me a bit.”

Six months after the class ended, I e-mailed him to ask whether he was still worried. “I got this e-mail right after my Econ 201 class, the intermediate sequence for the major requirement,” he wrote back. “So it looks like I’m no longer worried that what I’m learning is ‘wrong.’ Actually, the conversation we had doesn’t really make sense to me anymore. I now understand that any one school of economics can’t explain and predict all the intricacies of human economies.”

What he’d come to realize, he wrote, was that “it isn’t a question of correct theory or incorrect theory, but whether or not the results of the implementation of that theory are right or wrong in a moral sense.”

In other words, it’s a question that economics alone can’t answer.