The lies we tell

Former Canterbury Professor, David Giles, now at Victoria University in Canada, recently posted on his blog about the pitfalls about teaching something you know to be wrong at a lower level requiring the students to unlearn it at higher levels. He then presented an example from econometrics courses regarding the necessity of the assumption of normally distributed errors for certain results in the standard linear regression model.

 

Being a microeconomist not an econometrician, this set me to wondering what are the common lies we tell in lower level micro. By this, I don’t mean statements about the world of which someone might contest the empirical validity (e.g. minimum wages cause unemployment), or even the assumptions we make or, more often, are accused of making but never do (e.g. “people are rational”). Instead, I am referring to things that are unambiguously conceptually wrong.

I can think of three common ECON 100 microeconomic lies:

1. Diminishing marginal utility: We have known since Pareto and Hicks that this concept is meaningless, and neither necessary nor sufficient to show either downward-sloping demand or even diminishing marginal rates of substitution, but it seems to be


2. Consumer surplus: The answer to no known economic question, this is typically taught at first year not as a useful approximation but the actual value of the difference between the willingness of consumers to pay and the amount they actually had to pay.


3. Deadweight losses of taxes constructed by comparing total surplus with and without a tax: The deadweight loss triangle corresponds quite nicely to the idea of Pareto inefficiency (at least in contexts where partial equilibrium analysis is reasonable), but the ECON 100 derivation that comes from adding up total consumer plus producer plus government surplus rests on no welfare foundation that I know of. It is not Kaldor-Hicks, since government revenue is considered as a separate entity to the surpluses of individuals.

Any others that anyone can think of? How about the lies we tell in macro?

Note: Please don’t get me wrong; what I am calling lies here are not attempts to pull the wool over students’ eyes or sell a political viewpoint. I don’t think there is ever any justification for diminishing marginal utility, but consumer surplus and deadweight losses are useful concepts to teach that give appropriate conclusions if used in the right contexts. It certainly is better for students to have to unlearn these concepts slightly, than to be hit with duality theory and general equilibrium in their first year.