Microeconomics: A Meta-Lesson

For those that don't already know, I teach a night course in the Principles of Microeconomics. 'Night course' means that I cover a weeks worth of material in one evening, a 3-hour marathon class (I do provide breaks; I'm not a slave driver yet). This week we talked about perfect competition, specifically whether perfectly competitive markets are good or bad. It's a really exciting lecture, because we get to see how all of the decisions in competitive markets perfectly match the desires of the people involved, and how no possible change to such a market exists that can make society better off (for a decent overview of the topic, you might try this site). We're getting into the part of the course I really like to teach.

After class, I had a student (who is originally from China) ask if people from different religions would disagree with anything I was presenting. It's a great question, particularly when we get to the topic of Welfare Analysis. There are plenty of arguments against positive neoclassical economics (what we teach freshmen) by other schools of thought - Austrians, Marxists, Feminists, even Behavioralists. But not many specifically religious positions would question the description of the world economists offer.

When it comes to determining if the world economists describe is good or bad, though, lots of opinions open up. Devout Muslims would say that the system of interest rates common to market economies is immoral. Many mainstream Christians would say that the problem with markets is that the encourage greed (or Avarice if you're a pre-Vatican II Roman Catholic). I don't know with much certainty, but I suspect Buddhists would object to treating many goods and services like commodities. Personally, I find no religious objection to any of those things. In fact, like most economists I think interest rates for investment (loans for consumption are another matter) are good, and there are relatively few goods or services I think shouldn't be traded (I'll let you guess which ones they are).

But I do have problems with neoclassical welfare analysis. My objection is a bit subtler, though. I have no problem believing that competitive markets lead to resource movements that perfectly reflect the desires of the people (up to, and possibly including, the issue of income distribution). But I am not comfortable with the jump that says this is necessarily the best society can be. Implicit in this view of the world is the assumption that what people want and what is best for them are the same. Now, I just finished reading Judges, and I'm not getting a "people only want what's best" vibe.

There are a lot of self-destructive desires in the world, and this is the danger that would run rampant in a world where all markets where perfect with no intervention by the government. While in a lot of circumstances I think there is good justification for saying that people may be wrong about what's best for them, but no one else knows better. There are a lot of circumstances where I (as one who believes the world is the creation of a God who has not kept silent) think that is incorrect, too. I don't tell my students this, because they're hanging on for intellectual dear life as it is. But it is worth thinking about.

Markets can be perfect without being infallible. This concludes our meta-lesson.