The Purpose of an Economics Education: On Diane Coyle's Markets, States, and People

The Purpose of an Economics Education: On Diane Coyle's Markets, States, and People

In designing a curriculum or writing a textbook, the primary considerations have to be, first, to whom is the material addressed, and second, what it is hoped they will do with the information. The second question is important as it has two basic answers: some courses are designed to impart knowledge that students will eventually apply in a personal or professional context. These tend to be electives or courses taken as part of a particular major—electromagnetics for example will be important for an electrical engineer, anatomy for a surgeon. Many others, however, fall into a more difficult category—courses that are taught simply because we think most students ‘ought’ to know them. 

In the US at least, social science courses have long been justified by the philosophy of Benjamin Rush, who said of education at the outset of the US republic that “In a state where every citizen is liable to be a soldier and a legislator, it will be necessary to have some regular instruction given upon the ART OF WAR and upon PRACTICAL LEGISLATION.”  Thankfully, most Americans are no longer liable to be soldiers—but every American is called on to vote or not vote on representatives and often directly on policies that will impact the country. For that reason, a basic understanding of economics is important because eventually every person will be asked for their input on economic questions; however, too often the texts and curricula taught to econ students are unuseful and, with their oversimplifications, worse than no knowledge at all. Relegating ‘economics for public policy’—the kind of course that truly delves into the implications of economic policy decisions—to a niche designed for a small section of students who will be directly involved is a mistake. Texts used to introduce economic concepts need to be selected to ensure that they provide a balanced introduction to the most salient considerations of economic policy, since these are precisely the sort of considerations every student is going to be asked to weigh when evaluated a proposal like a higher minimum wage or utility deregulation.  Diane Coyle’s Markets, State, and People provides a good example of what such a text should look like. 

As a private tutor in economics, I’ve gotten the chance to see economics courses ranging from high school classes aiming to meet minimum state standards to undergrad courses in selective universities. The vast majority suffer from similar problems—an overemphasis on neat models with few unknowns and straightforward computations. This is particularly true of Advanced Placement (AP) level courses but is a tendency in most classes because such questions are satisfying for students and easy to grade for instructors. A sample problem might assume supply and demand lines for labor, with a constant slope and known quantities. Given this input, students are taught that they can calculate a dollar figure for the deadweight loss created by a given minimum wage. It could be a valuable exercise, to be sure—understanding at least the concept of deadweight loss and unanticipated outcomes—and getting a neat dollar figure at the end makes it an easy exercise to assess while also making the discipline as a whole look scientific.  But it builds in dozens of assumptions that are only explained towards the end of upper level classes—that the labor market is perfect, that demand for labor is unaffected by the income of minimum wage workers (an absurdity obvious to anyone who has actually noticed the clientele of many businesses that employ such workers), and many others.

This oversimplification is of course not ideologically neutral—the AP curriculum demands students understand that “Government intervention in a market producing the efficient quantity through taxes, subsidies, price controls, or quantity controls can only decrease allocative efficiency”, and rare is the class that pays adequate attention to the key qualifier in a market producing the efficient quantity. Some state-level standards are even more nakedly ideological; Texas state standards for example require teaching the benefits of a free enterprise system over other economic organization.

The best economics courses of course break outside these constraints—working to give students some understanding of market failures like externalities and give students some idea of how common monopoly and monopsony power are in modern markets. Even here though instructors run into two problems—for one, such cases are often treated as exceptions to the rule; after three months of assuming every good is rivalrous and excludable, a few examples at the end of the course don’t really shake the overall message that markets should fundamentally be trusted to manage themselves. The second problem is that they are treated with the same certainty as problems assuming efficient markets—in other words, air pollution is assigned X level of negative externality, which can be expressed as a dollar figure and corrected for with an appropriate tax. I’m guilty of this of course as well—though it’s seldom a problem in their books, I like to make my students calculate the increase in employment given a minimum wage in a labor market dominated by a monopsonist (an employer who buys all the available labor in the market).  The exercise is important to show a necessary complication to their basic understanding that ‘price floors reduce market efficiency’, but at the same time I’m still giving them precise figures and a neat graph to work with, treating economics essentially like applied coordinate geometry.

For economics curricula poisoned by these problems, Diane Coyle’s survey Markets, State, and People provides a powerful if incomplete antidote. Incorporating work like this earlier into economic education would help students prepare to be informed citizens and voters far better than the current most common curricula. Coyle’s book is lively and interesting enough to be read enjoyably outside of an academic context—I’d recommend it to anyone who wants to understand the ‘big picture’ of economic debates about the role of government and definitions of welfare. But it is marketed as a textbook for economics and policy courses, and to understand this use it’s important to look at the current state of economic education—because ultimately, not only does the book provide a useful text for these courses, but it demonstrates the need to more widely teach these concepts to supplement the economic principles currently taught to most students. 

A book like Markets, State, and People not only serves to offer an introduction for such students, however—it could make a valuable addition to any economics education, and indeed is a shining example of the sort of text that should be assigned alongside traditional macro and microeconomic textbooks. Coyle’s work not only succeeds on its own terms, but shows the possibilities for expanding the use of these kind of texts outside their current narrow confines.

The first chapter of the book alone provides precisely the context students need to take the graphs and tables in a typical economics course with a grain of salt. Coyle opens with a discussion of the many assumptions that are made to justify the theory that markets are inherently efficient. Of particular importance are the assumptions of symmetric information, rational consumer behavior, and rival goods (goods that cannot be simultaneously used by more than one consumer). The last stands out, as a particular brand of non-rival goods—goods that are nonetheless excludable, so called toll or club goods—are gaining an increasingly dominant position in the modern economy, but most students taught only up to state econ standards are not in a good position to understand them.

 A standard curriculum like the AP, which teaches that “Private goods are rival and excludable, and public goods are non-rival and non-excludable” and largely leaves it at that, cannot possibly hope to describe a company like Apple, which almost exclusively creates non-rival goods (patents, designs, and programming) and then contracts out the creation of their rival components (the physical hardware).  Indeed, from tech companies like Apple or Microsoft, to pharmaceutical giants like Pfizer or Johnson & Johnson, to media giants including Disney and NBC, many of the most profitable firms in the US could be described as producing primarily non-rival goods.

Dealing simply with rival and nonrival goods with the depth that Coyle does is an enormous improvement over the economics understanding students are left with if they don’t pursue upper level economics. The prominence of non-rival goods upends the initial narrative taught to students about diminishing marginal return. Unlike Tesla trying to increase its production of cars, Microsoft can sell more copies of Office for almost no additional cost, certainly without increasing the marginal cost per copy. As the world currently races to produce and distribute as many vaccines as possible, it could be that Pfizer is taking on increased marginal costs to ramp up production, but few would go so far as to say that in the long run Pfizer would make more profit selling fewer vaccines than more for the same price, and yet much standard economics texts generally teach that such a quantity exists—it is critical to explaining why multiple firms would continue to engage in monopolistic competition.   

Coyle’s discussion especially of digital commons is refreshing also in its emphasis on social norms in dictating the behavior of markets—a stark contrast to books that treat humans essentially as homo economicus, or policy texts that focus only on the role of formal government action in dictating property rights. She explains that “The role of assumptions about norms or conventional patterns of behavior in defining property rights is often overlooked…If my neighbor’s fruit tree drops apples into my garden, we will both assume I can keep them, and she won’t call the police if I turn them into a pie. In the digital world, the early norm was that content was free, but over time businesses have made a land grab—a bit like the enclosure of the physical commons.” This launches an extended discussion of how social norms, not just strictly rational behavior or interest seeking, play into the design of markets or methods of production/distribution that substitute for them. It is a discussion which escapes the common binary of ‘markets vs state’ and instead hints at the reality that both markets and that state arise out of and are to an extent constrained by socio-cultural beliefs.

The role of history and cultural beliefs in shaping economic assumptions and policy is another strength of the book.  Economics does not happen in a vacuum, and the narrative descriptions Coyle includes of how the Great Depression, 1970s stagnation, and other major events worked to shape economic understandings and policies help provide a more nuanced understanding of why markets and states interact differently in different places. The discussion goes well beyond most cursory summations of economic intellectual history, which tend to focus on fiscal and monetary policy (featuring Smith and Ricardo as the patriarchs of the discipline and Keynes and Friedman as the main protagonists), and gets deeper into views on government ownership of industry, regulation of monopolies, and other topics rarely given adequate discussion. This level of background also helps Coyle compare regions, specifically the US, UK, Continental Europe, and East Asia—and explain why their economic systems have evolved differently while avoiding a setting up one as the default or natural system against which others are contrasted. 

These shifts in policy also provide an entry point for discussing government failures—Coyle introduces the innovations of public choice theory and provides a frank description of where government, just like markets, can operate inefficiently and to the detriment of the people it’s seeking to assist.  The role of state-owned or heavily regulated firms is another often overlooked component of economic study that Coyle covers effectively. 

This focus on regulation and state ownership, in fact, to an extent crowds out a more extensive discussion of taxation. On the one hand, this is welcome—too often the role of government in the economy, especially in designing the distribution of wealth therein—is reduced to a series of decisions about taxing and spending.  Coyle shows how regulations, particularly those aimed either at creating competition in monopolistic economies or pushing back against the inequality inherent in natural monopolies, can have a dramatic income on outcomes for both firms and customers. Particularly valuable here is here delineation between firms that compete “in” the market and firm that compete “for” the market. Too often market advocates will argue that Facebook, for example, is not a natural monopoly, since it had to dethrone the previously dominant MySpace, but Coyle explains well that simply having to compete for control of the market does not bring about the same impacts as competition within the market, especially in a case where network effects (a phenomenon entirely ignored in other introductory econ courses) are strong. 

On the other hand, Coyle’s understandable decision not to dive into the economics of taxation does leave the book with a few unfortunate simplifications. While space is devoted to Pigouvian taxation in theory and practice, the overall message on taxation is that “Taxation (except in the rare case of Pigouvian adjustments for externalities) creates inefficiencies and, other things being equal, therefore tends to reduce the economic growth rate.” I would argue that externalities that can appropriately be combatted with taxes are not at all rare—we live in a world were the very core of most economies is electrical generation powered by fossil fuels, which are creating a potentially disastrous externality in the form of global climate change and killing millions in the meantime through preventable ailments.  A carbon tax scaled to the true size of this problem would be, at least in the short term, absolutely enormous. 

Aside from Pigouvian taxes (strictly defined), there a is a strong case, made by economists including Joseph Stiglitz and Noah Smith, that taxing land values does not increase inefficiency, because the quantity of land available cannot be diminished as a result. Indeed, such a tax could lead to greater efficiency by discouraging speculation and weakening the power of rent seekers. Considering only Pigouvian taxes on carbon and the special case of land already leads to the conclusion that a very substantial portion of the economy in developed states (in the US, privately held land is valued to be at least $15 trillion, and oil and gas companies worldwide are valued at over $4.5 trillion) is in fact not subject to this broad rule about taxation and inefficiency. Moreover, it is possible, as argued by Emmanuel Saez and Thomas Piketty, that the principle goes beyond simply land and actually covers most very high incomes. If the vast majority of income above a certain amount is in fact generated by rent seeking, then higher taxes will indeed reduce incentives, but this reduced incentive will actually have the salutary effect of limiting the rewards of rent seeking and perhaps directing those efforts to other, more productive uses. 

These discussions on taxes, however, probably merit a textbook of their own; Markets, State, and People is not intended to be a book primarily about fiscal policy and the decision not to delve into that topic is a reasonable one. The only concern that arises is that the very summary view of taxes leaves readers with the same one-dimensional view of them that a traditional economics text gives of price ceilings or floors. Overall, on the topics of its actual focus, the book performs admirably.

The only other ‘weakness’ of the work has nothing to do with the text itself, but that it will sadly not be read by nearly the variety of students that need to read it. Coyle provides a welcome focus on the importance of social norms and cultural beliefs in shaping how markets or non-market systems of allocation work in practice—the necessary implication of that fact is that an economically sophisticated population is much more likely to achieve the kinds of solutions we need. Books like Markets, State, and People need to be incorporated not just into specialized courses for those few students seeking a policy career, but as part of a the basic civics education required of high school students. Society continues to encounter both old and new problems for which economics can provide guidance—the question of de-carbonizing the economy, or the acute effort to encourage vaccination. But even the best economic recommendations are likely to meet resistance fatal to their efficacy if the population as a whole lacks an understanding of their economic rationale.

The great work Coyle has done here, however, would go a great way toward addressing that problem.  As fun as it is to work with graphs and calculate with entirely imaginary precision the impact of a minimum wage on societal welfare, our economic education strategy needs a rehaul. A work like Markets, State, and People should be standard to supplement—or perhaps even precede—students’ introduction to those omniscient line graphs, as improving students’ understanding of the concepts in this work is critical if we want to maintain a government that is at once economically competitive and responsive to the population. 

Featured Image is The Prima Macchina for the Chinea of 1770: An Roman Building for Commerce, by Giuseppe Vasi