Economic Knowledge and Economic Output

I have been asking over and over again whether New Mexico’s higher education institutions are providing as great a return as they could. I have mostly focused my criticism on the unexplained differences between various schools’ costs per student, implying different policies in school administration might lead to greater efficiency. Another important consideration for the well-being of state’s economy is what the students are learning (and what they are not learning).

We could divide learning into ideas that are personally useful and ideas that societally useful. The first kind directly helps a person operate most effectively in life and business — to correctly apprehend the reality around herself and to make choices according to the most reasonable theory she knows. The second kind contributes to better (worse) democratic outcomes as the wisdom (lack of wisdom) are meshed together. In both cases, if many people have foolish ideas, then society as a whole will be less wealthy, as many mistakes are made in business and government.

It seems reasonable to hope that state-subsidized institutions support wisdom and not foolishness. But, there is evidence that this isn’t the case.

Zogby International researcher Zeljka Buturovic and George Mason University economist Dan Klein recently co-authored a paper in Econ Journal Watch that indicated that college students don’t do any better than the uneducated in answering questions about basic economics. George Leef at the Pope Center discusses some of the explanations for this phenomenon, including:

The most persuasive explanation is the one they offer last: Few students are exposed to economic thinking in their college coursework. Courses in the principles of economics are rarely required and even when students do take such courses, it is by no means certain that the professors will teach them in a way that causes students to grasp such lessons as “price controls cause shortages.” Many economics professors are registered Democrats and are comfortable with government intervention in markets.

The questions are all about the basic economic verities that markets and trade have produced and continue to produce a great amount of wealth for society, and that restrictions on market activity often have negative side effects. Certainly, we would expect to see quibbling with some of the language of the questions, but some of the questions have clear answers, so anyone who gets them wrong is really misled in his thinking. See the two columns for college-attendees and graduates in Table 1 on page 183 (a pdf of that page is here).

Missing one or two of the questions could be due to misinterpreting the wording of the questions, but the large blocks of mistaken answers point to a misunderstanding of price theory and markets. How can 1/3 of college graduates believe that the standard of living is not any higher today than it was 30 years ago? Not knowing GDP growth has been dramatic is like not knowing about the Cold War. Isn’t this one of those things an “educated” person ought to know? Meanwhile, the questions about rent control and minimum wage illustrate students’ non-understanding of the effects of price ceilings and price floors. Such students would probably agree with the proposition that the government can make people’s lives easier simply by changing prices on a spreadsheet. Gee, why can’t we fix prices all the time to make everyone richer?

In thinking about the role of universities in preparing a new generation of leaders to guide society, it is depressing to consider that many of these individuals have not learned the basic tools of economic logic and some elementary facts about our society’s wealth creation processes. Economics has important lessons about structuring incentives and designing institutions to motivate individuals towards cooperative, productive behavior. It is no surprise that in the absence of this learning we see spending policies that lead to pernicious budget deficits even as the heavily funded programs don’t work.

A worse version of this story could be that colleges not only fail to teach economic verities, but actually work against a clear understanding by filling students’ heads with confused prattle about social democracy and other anti-capitalist ideological fetishes. In doing so, the schools are effectively undermining society’s ability to create wealth — a wealth that supports the operation of the academy. I ask, to what degree are New Mexico’s budget problems today, directly linked to a failure of certain college-educated citizens to apprehend basic economics?

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One Reply to “Economic Knowledge and Economic Output”

  1. One example: An island with no resources has economic prosperity contrasted against a rich state with 10% unemployment. The difference is that the people on the island have the freedom by be prosperous while the state is bogged down in taxes and regulations. (The island is Hong Kong)

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