The Revolution Will Begin with a Textbook

Tom Green

I don’t care who writes a nation’s laws – or crafts its advanced treaties – if I can write its economics textbooks. Paul Samuelson

Scenario 1

If you’re a business undergrad, the introductory economics course is a prerequisite – no way to avoid it if you want to get out with that degree. Maybe you figure the course won’t be all bad. After all, you’d like to understand how the economy works, how it affects your future. Climate change is on your mind, and you know rising greenhouse gas emissions are linked to economic growth. You’re also concerned about social justice, whether free trade will lift people out of poverty or whether it’s a race to the bottom. You want your economics course to help you deal with these issues.

“You’ll need to memorize 1001 supply and demand curves, be able to regurgitate stuff for the exam that you know is wrong,” warns the second-year student as you hand over your cash for his tattered text, “It’ll put you off economics for good.” You brace yourself for the worst.

Flipping through Paul Samuelson’s Economics, you see that it was first published in 1948, and you wonder how they can teach from a text that had already celebrated half a century in print before the new millennium rang in. Samuelson, now in his nineties, has handed over the pen to Nordhaus, who put out the eighteenth edition. (Even for those students whose introductory textbook isn’t written by Samuelson, there’s a good chance they are pretty hard to tell apart. Since Samuelson helped rewrite large parts of economic theory, his textbook inspired dozens of copycats.)

Introductory microeconomic theory rests on the idea that individuals are perfectly rational and seek to maximize their “utility.” Samuelson admits that utility is a construct that has no basis in psychology; although he uses the terms ‘consumer’ and ‘individual,’ his model is built around a fictional character that critics have dubbed Homo economicus. This economic man (yes, he is male) never had a childhood, never has children, has never depended upon a caregiver and does not have anyone he provides care for. He only experiences well-being by consuming. He is rational, selfish, a psychopath.

Economists must never question whether Homo economicus’ consumption actually makes him happy. They assume he isn’t influenced by hundreds of billions of dollars in advertising or the purchases of his neighbors. If Homo economicus buys something, it gives him utility; his consumer sovereignty must be respected.

Relying on Homo economicus excuses us from tackling difficult questions about how real individuals, groups of citizens or members of families actually seek to find happiness. The framework within which he acts excuses us from troubling ourselves with the distribution of wealth, since utility comparisons between individuals are not allowed. In other words, neoclassical economists will say they cannot comment on whether a millionaire or a pauper would get the most utility from a handful of coins.

Samuelson’s Economics wastes few pages before introducing us to the profession’s magic wand: the word ‘assume.’ The typical economics professor will have already made six implausible assumptions before their students have digested breakfast. To use the word is to signal that we are about to enter into a neverland with features warped as needed to fit into an elegant mathematical model. The next time you hear it, ask what would change if ‘assume’ were replaced with ‘pretend.’

The weakness for basing models on unrealistic assumptions could be a harmless intellectual pastime, equivalent to solving Sudoku puzzles. But these flimsy models are used by economists to formulate policies believed indispensable to solving society’s economic woes. These policies are then flogged to politicians and corporate leaders. Rarely mentioned are the original assumptions that might limit the application of these policies in the real world.

If Samuelson’s book has one take-home message, it’s that societies must promote economic growth now and for all time. With growth, we are all better off. Without growth, we cannot afford to help the poor or to clean up the environment. We must get richer by pumping more oil, mining more ore, chopping more trees, consuming more widgets, so that we have new wealth to tackle climate change from burning more oil, to restore habitat damaged by logging, to help people displaced and poisoned by mining, to dispose of broken widgets. Welcome to the growth treadmill.

How does Samuelson square infinite economic growth with a non-growing planet? By omitting nature, because to economists land is a constant that doesn’t affect our calculations. Ignoring the biosphere makes the math easier and suggests policies that make the corporate world happy.

Meanwhile, over in environmental studies, students discuss the warning of the UN’s Millennium Ecosystem Assessment: “Human activity is putting such strain on the natural functions of Earth that the ability of the planet’s ecosystems to sustain future generations can no longer be taken for granted.” And in the psychology department, an instructor puts up a graph that shows that the average per capita income in the developed world has doubled in a generation, yet people are no happier. Do economists never leave their department hallway?

Samuelson’s Economics, along with the copycats found in classrooms across North America, would be merely a waste of time and trees if they did not have such a noxious effect on public policy. Most students only take one or two economics courses, and while research has shown that the typical student recalls few details from these courses, they do absorb the neoclassical canon. Well-being comes from consumption, economies must grow, free trade makes nations wealthier, governments should let markets do their magic. Equipped with simplistic recipes, many of these same students, in positions of influence and power years later, will make shoddy decisions that damage the climate, result in habitat loss, propagate injustice, or undermine prospects for happiness.

Scenario 2

Flipping through your introductory text, you discover that it’s not made up of countless variations of curves intersecting. Prose that celebrates perfectly competitive though non-existent markets seems to be in short supply. Economic heresies – “other goals may sometimes outweigh the goal of maximizing production” and “wealth itself is not well-being” – are committed left and right. After 18 years, the economics department has finally switched textbooks.

While this new text still has supply and demand curves, there are also discussions about global warming and biodiversity loss. The authors draw on insights from psychology. They raise questions about overconsumption in rich countries. And they expose the mainstream circular flow model – the one that endlessly creates products without material or energy inputs, and without generating waste – as a fraudulent perpetual motion machine. You are, to say the least, a bit taken aback.

Welcome to Microeconomics in Context, by Neva Goodwin and three of her colleagues, a team that has expertise in mainstream, feminist, institutional and ecological economics. Their text dives right into poverty, inequality, unemployment, the gains and costs involved in trade, the linkages between economic activity and the environment. To the trio of activities that are normally the focus of economic analysis – production, distribution and consumption – the authors add resource maintenance. It’s a massive leap forward for economists to methodically look at what is needed in order to tend to, improve or preserve the natural and social resources that support economic activity and quality of life.

Homo economicus still makes appearances in Goodwin’s book, but mainly to help students converse in the language of neoclassical economists. Instead, the authors focus on how society can shape the economy to enable people to live healthy, meaningful lives and to live in harmony with each other and with nature. They seek to resurrect the profession’s historical interest in exploring means other then economic growth for alleviating poverty and deprivation. Their economics once again focuses on well-being, rather then the artifice of utility, which allows us to replace the maximization of consumption with more complex goals.

Markets still have their place, the authors concede. They communicate information about desires and scarcity amongst buyers and sellers. They create incentives and they help coordinate economic activity. But they do not correct for inequities in distribution, leaving some desperately poor while others buy a third vacation home. Markets can also favor the undemocratic exercise of power, and they can undermine the conditions required for sustainability and community. Economic policy, this text argues, must take into account these realities.

Microeconomics in Context is the ideal text for getting a solid foundation in both neoclassical microeconomics and its limitations. It also looks sufficiently like a mainstream textbook that some profs might be able to teach from it without the department chair noticing that a heretical text had made it into the building. But because it seeks to provide a foundation in the neoclassical approach, even from a critical perspective, its treatment of alternative schools of thought is at times limited.

Scenario 3:

Ecological Economics: Principles & Applications, a new textbook by ecological economists Joshua Farley and Herman E. Daly, takes a radically different approach from Samuelson’s. You thumb through 136 pages before your eyes meet the first supply and demand curve.

Daly and Farley stress the difference between ends and means, and the importance for economic policy to be clear on what ends are being pursued. Ecological economists argue that the neoclassical economist’s growth fetish shows confusion between ends and means. Unrestrained growth increasingly erodes human well-being as much as adding to it, and this text seeks to challenge the neoclassical assumption that humans are just bundles of insatiable wants.

Economists like Daly and Farley are clear that their analysis is guided by three fundamental values. First, humans should ensure that economic activity stays within nature’s limits, or that it has a sustainable scale. Second, the distribution of wealth and economic opportunity should be just. Third, economic activity should contribute to human well-being.

In service of these values, Daly and Farley attack how the mainstream applies its craft to the environment, such as calculating the “optimal” level of pollution. They make clear the absurdity of trying to express all things of value, such as the environment, in monetary terms. The authors likewise set their sights on the logic surrounding free trade, logic accepted by 95 percent of today’s mainstream economists. Free trade supporters are convinced of their position by the theory of comparative advantage, which assumes that capital is not mobile between countries; this assumption may have been true back in 1817 when the theory was first put forward, but it no longer holds in this era of footloose capital. Free trade theory also assumes that trade does not use up natural resources or degrade ecosystems. The end result? While the 15 richest countries became 15.5 percent richer from 1989 to 1999, the 15 poorest countries that were not involved in wars became 3.2 percent poorer. And that’s not even deducting the wealth they lost in feeding export markets, wealth in the form of clearcut forests, reduced biodiversity and soil erosion.

Daly and Farley demonstrate how the assumptions of neoclassical theory limit its applicability in ways that we have failed to acknowledge; yet while they may be severe critics, they do not discard the whole body of thought. Neoclassical economics is well suited to examining small adjustments in markets – the impact of selling one more car on car prices, worker wages and manufacturer profits. They recognize that incentives in the marketplace will need to be adjusted in order to protect the environment, and in this area mainstream economics does offer some policy options. Where it fails is in tackling the big macro issues – like how many cars we can allow to burn fossil fuels before we inadvertently cook ourselves.

Ecological Economics does not have the polished look of its neoclassical cousins, but there are generous helpings of wisdom within its 450 pages. It offers a coherent treatment of a transdiscipline that is still “under construction” as more economists, ecologists, psychologists, sociologists and others join the effort to build a body of economic theory that addresses sustainability head on. At times, the pages are dense with concepts that make for heavy reading, but the companion workbook provides clear examples and case studies that will help students see how ecological economics is and could be applied. Many former students will regret that this was not the required text the first day they sat down in Econ 101.

Can a mere textbook really start a revolution?

Alfred Marshall’s Principles of Economics, first published to great applause in 1890, brought neoclassical economic theory into a coherent whole and influenced economists in England and abroad for well over a generation. Then Samuelson’s text appeared in 1948, solidifying mainstream economics’ influence on public policy. Both of these were revolutionary in their own ways, and have proven the power of textbooks to shape our thoughts and influence. Unfortunately, these revolutions naïvely embraced the market’s invisible hand, without recognizing that the market also has an invisible foot. They set the stage for an obsession with increasing consumption and endless economic growth.

We have thus reached a critical point. Natural systems are unravelling from the stresses of economies organized to maximize the consumption of those who can afford to pay. The social fabric strains under the paradox of unimagined wealth co-existing with excruciating deprivation.

Two new textbooks challenge mainstream orthodoxy and set out an approach to grounded in understanding ecology and the complexity of human societies. These textbooks are not anti-market. Rather, they offer more nuanced tools and a more a realistic framework. They provide a foundation for shaping markets so that people can meet their needs and live fulfilling lives on a flourishing planet.

Since these new texts will actually help us to understand the real relationships between the economy, society and the environment, they make studying economics relevant again. Are they the first of a wave that will soon displace their neoclassical competitors? This will depend on students demanding that their textbooks be credible and relevant. And it will depend on economics departments and professors finally admitting that mainstream introductory economics texts are too flawed and dogmatic to be worthy of scholarly study – unless in a course studying the troubled history of economic thought.

Tom Green is a Vancouver-based economist who has worked for over a decade using ecological economic analysis to improve resource management. Frustrated by the fact that economics departments are still subjecting their students to obsolete theory, he’s been putting increasing effort into bringing curricula into the twenty-first century.