As the spring semester gets started, I am taking stock of all of the material that I have taught in the past semester of my Introduction to Economics courses and seeing how I can best tweak it for this next run.
One thing in particular that I have been thinking about how to discuss and analyze when ordinary things in markets “go wrong,” are a bit shady, or . I am not talking about the classic market failure arguments like externalities or public goods, but little micro-failures, often of single businesses or industries: primarily deceptions and behavioral flaws in consumers that businesses are supposed to take advantage of and mislead for profit.
What stimulated my thinking on this is the fact that almost half of my students wrote one of their papers (either a short current events article or an Op-Ed) last semester on Black Friday, as these assignments took place in the fall. While most of them made convincing opportunity cost arguments or argued the benefits and creative destruction of innovation via shopping online, a few of them wrote on the “tricks” or the psychological deceptions that businesses play to unscrupulously attract unwitting customers to fatten their bottom line.
I am sure that I have nudged these students’ views on markets significantly and helped them understand the benefits of markets (one student of mine admitted at the end of the semester that he had entered the course a socialist, only to do a 180 and see the benefits of markets once he understood them). But as a teacher who is passionate about both the content and the pedagogy, it got me thinking about how I can address this topic more productively.
I might have brushed this off as a minor topic had this not also been a significant time to be thinking about this topic, with the recent release of George Akerlof and Robert Shiller’s Phishing for Phools: The Economics of Manipulation and Deception, which essentially seems to make the argument that businesses systematically mislead a stupid members of the public to act against their own interests, in pursuit of a quick buck. (I suspect Akerloff and Shiller don’t want to just come out and say this is their argument, so they cloak it in cute neologisms like “phishing” and “phools.”) So I was particularly delighted to read the several posts that Don Boudreaux has had on this topic, an earlier review of the book by Alex Tabarrok, as well as Peter Klein‘s short but decisive critique.
I have always taught my students (beyond what a traditional economic course would teach) that markets are a process of discovery, and that explanations of social phenomena resorting to some flaw in human nature (“people are greedy” or “people are irrational”) are rarely good analyses. Rather than finger pointing, we can get a lot more analytical traction and explanatory power by observing what the institutions and incentives are that channelled that human weakness into an outcome we judge to be bad or good. Markets only lead to socially good outcomes (however we define that) under specific institutional conditions.
However, I am still looking for good short articles on these micro-market failures that are readable for freshmen in an introductory course. I would love to have them read, e.g. works by Oliver Williamson, Elinor Ostrom, Klein and Leffler, etc. that focus on either the role of market mechanisms such as reputation and price premiums, in combatting phishing and opportunism, or in non-market (but non-State) institutions that emerge as firms or norms to create governance strategies that reduce opportunism. I am having my more advanced seminar in Austrian Economics read some of these excellent sources, but for my principles class, I would love to hear any suggestions.
I am experimenting with teaching my lessons in a different order to maximize this impact, and having specific political economy lessons late in the semester each on the knowledge and the incentive problems of economic systems (including market processes). I also want to put more emphasis on building a toolbox of questions that students should always ask when they encounter a social problem. I always have them ponder the knowledge and incentive problems of any issue, as well as trying to compare feasible relevant alternative institutional solutions. Now I will give more precedence to having them ask — when they see a scam or a micro-market failure for instance — Are entrepreneurs leaving money on the table? If one business seems to be exploiting consumers, why hasn’t another entrepreneur come in and offered a better service or a lower price to drive that unscrupulous rival out of business?