The Assumptions Economists Make

The Assumptions Economists Make

by Jonathan Schlefer

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Overview

Economists make confident assertions in op-ed columns and on cable news--so why are their explanations often at odds with equally confident assertions from other economists? And why are all economic predictions so rarely borne out? Harnessing his frustration with these contradictions, Jonathan Schlefer set out to investigate how economists arrive at their opinions.

"A lucid, plain-spoken account of the major economic models, which Schlefer] introduces in chronological order, creating a kind of intellectual history of macroeconomics. He explains what the models assume, what they actually demonstrate--and where they fall short."
--Binyamin Applebaum, New York Times blog

"Fascinating... Schlefer's] book is a tough critique of economics, but a deeply informed and sympathetic one."
--Justin Fox, Harvard Business Review blog

"This book is an impressive and informative analysis of the economics literature--and it presents some useful insights about how a more eclectic, catholic approach might allow economics to progress more convincingly into the future."
--Michelle Baddeley, Times Higher Education

"The Assumptions Economists make is] a knowledgeable...broadside against neoclassical economics...Schlefer's gripes concern model-building run amok...His criticisms of these models are original and sophisticated."
--Christopher Caldwell, Literary Review

Editorial Reviews

Literary Review - Christopher Caldwell

The Assumptions Economists make [is] a knowledgeable...broadside against neoclassical economics...Schlefer's gripes concern model-building run amok...His criticisms of these models are original and sophisticated.

Choice - A. R. Sanderson

The Assumptions Economists Make is a valuable book for readers who like to argue, reflect, and advance knowledge.

Times Higher Education - Michelle Baddeley

This book is an impressive and informative analysis of the economics literature--and it presents some useful insights about how a more eclectic, catholic approach might allow economics to progress more convincingly into the future.

Harvard Business Review blog - Justin Fox

Fascinating...[Schlefer's] book is a tough critique of economics, but a deeply informed and sympathetic one.

New York Times blog - Binyamin Applebaum

A lucid, plain-spoken account of the major economic models, which [Schlefer] introduces in chronological order, creating a kind of intellectual history of macroeconomics. He explains what the models assume, what they actually demonstrate--and where they fall short.

Rawi Abdelal

A marvel of clarity and elegance, The Assumptions Economists Make is the best book I've read about the ideas and practices of economists. With great respect, curiosity, insight, and wit, Jonathan Schlefer has given readers a sense of how the models and metaphors of economics inform our most important public policy debates. He manages to connect the theories that economists produce--and the assumptions that go along with the theories--to economists' varied, influential roles in public life as policy makers and public intellectuals.

Lance Taylor

The Assumptions Economists Make is a marvelous piece of political economy. Jonathan Schlefer ably contrasts the two main approaches to macroeconomics--neoclassical and classical/Keynesian--and on social, historical, and political grounds strongly endorses the latter.

Choice

The Assumptions Economists Make is a valuable book for readers who like to argue, reflect, and advance knowledge.
— A. R. Sanderson

Times Higher Education

This book is an impressive and informative analysis of the economics literature—and it presents some useful insights about how a more eclectic, catholic approach might allow economics to progress more convincingly into the future.
— Michelle Baddeley

Harvard Business Review blog

Fascinating...[Schlefer's] book is a tough critique of economics, but a deeply informed and sympathetic one.
— Justin Fox

New York Times blog

A lucid, plain-spoken account of the major economic models, which [Schlefer] introduces in chronological order, creating a kind of intellectual history of macroeconomics. He explains what the models assume, what they actually demonstrate—and where they fall short.
— Binyamin Applebaum

Library Journal

Schlefer (research associate, Harvard Business Sch.; Palace Politics: How the Ruling Party Brought Crisis to Mexico) examines the "assumptions, models, and ideas of economists" to "shed light on today's economic questions." Not a history of economic thinkers, this is an examination of their prevailing assumptions, from Adam Smith to the present. Schlefer asserts that macroeconomic models failed to guide government policy before 2008 because economists got their neoclassical theory wrong, and he blames the economic troubles of 2008 and beyond on the instability of private financial markets. He disputes factors such as supply and demand, technology, and unionization as causes of the current recession, noting that many believed the "supply of better-educated workers increasing relative to lower-skilled workers would cause their pay premium to fall" when just the opposite happened. His analysis of these assumptions concludes with five recommendations for economists: to describe their beliefs transparently, to explain the structure of their models, to include critical factors affecting the models, to weigh conflicting models, and to explain what they do not know. VERDICT This is not a book for the lay reader, although one of the more engaging chapters covers income inequality. Interesting but complex, it will be best understood by economists.—Joanne B. Conrad, Geneseo, NY

Product Details

ISBN-13: 9780674975408
Publisher: Harvard
Publication date: 05/15/2017
Edition description: Reprint
Pages: 384
Product dimensions: 5.00(w) x 7.90(h) x 1.10(d)

Read an Excerpt

From Chapter Three: In Search of a Model



To combat mercantilism, Smith must discredit the idea that gold is the ultimate measure of value. And he must replace it with another theory of value and distribution. That is, he needs a theory about how the value, or price, of goods is determined, and how total revenue is distributed among capitalists who receive profits, workers who receive wages, and landlords who receive rent on land or natural resources.

He starts out by distinguishing “value in use” from “value in exchange.” “Nothing is more useful than water,” he notes—we would die without it—“but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” Setting use value aside, he sets out to explain exchange value. Why does a diamond exchange for a large quantity of other goods, while water exchanges for a small quantity of other goods (if, indeed, for any at all)?

The supply and demand story was already conventional wisdom in Smith’s day. “The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay” its production costs, as he puts it. He agrees that supply and demand affect prices in the short run: “A public mourning [such as the king’s death] raises the price of black cloth . . . and augments the profits of the merchants who possess any considerable quantity of it.” But Smith argues that the supply-and-demand mechanism does not govern prices over the longer run. It only ensures that market prices gravitate toward their “natural” or normal price: “Whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it.”

What determines a good’s natural price? In an idea reaching back at least to John Locke’s Second Treatise of Government, the philosophic foundation of the American Declaration of Independence, Smith posits a labor theory of value. It applies in the “early and rude state of society,” before anyone owns natural resources or accumulates capital. In that situation, he says, “The proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them one for another.” If it takes twice as much time to kill a beaver as a deer, a beaver is worth two deer.

Under capitalism, production requires not only labor but also, precisely, capital: factories, ships, tools. Moreover, natural resources such as farm land or coal seams, all of which Smith lumps under the rubric of “land,” are claimed as property and can no longer be used free of charge. Thus, the “natural” price of each good must be the sum of its component parts—the natural or normal wages of labor that go to workers, profits of stock that go to capitalists, and rent of land that goes to landlords. This accounting seems sensible. The price paid for a good has to go labor, capital, or land.

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