Sunday, June 5, 2011

What are basic economic principles?

Whenever someone says that all policy problems can be solved by markets, they appeal to something they call "basic economic principles."

If one goes to the open course page for the intermediate micro course offered at MIT, one finds the following topics on the syllabus:

Consumer Theory
2Choice, Preferences, Utility
3Demand, Revealed Preferences, Comparative Statics
4Consumer Surplus, Aggregation
5Variations to the Basic Choice Model (Time, Uncertainty)
Producer Theory
6Technology, Profit Maximization, Cost Minimization
7Supply, Aggregation
9Oligopoly and Game Theory
10Walrasian Equilibrium
Market Failures
12Public Goods
13Small Number of Agents, Nash Bargaining
Asymmetric Information
14Adverse Selection, Moral Hazard, Principal-Agent Model
15Auction Design
16Voting and Other Applications
Six out of fifteen of topics (8-9, 11-14) are about ways the market can produce suboptimal outcomes.  These topics are not esoteric any more (they are showing up in intermediate courses), and they have rigorous economic theory behind them.  It was time we stopped using the phrase "basic economics" to refer to idealized market conditions that often do not exist.