Microeconomics for all, by Paul Seabright

For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.


Thus begins a short but hard hitting essay by Paul Seabright. Regular readers will know of him as the author of the magnificent “In The Company of Strangers“, but in today’s blogpost, we’re going to be speaking about the essay I just excerpted from. This essay was written back in 2013, but if anything, it rings even more true today.

Because what we teach in microeconomics has very little to do with reality, and that’s just the truth.

A typical course in micro will work its way through consumer theory, producer theory, markets, and then throw in a sprinkling of topics to round off an introductory course: a bit about externalities, a bit about asymmetry of information (and related topics) and maybe touch upon risk and intertemporal substitution.

But as Paul Seabright says, most of what goes on in research based in microeconomic theory is so much more than that. For example (and this is my point, not his), if you are a microeconomics faculty, will you be able to explain to your students during an introductory course what, exactly, was the seminal contribution of Hart and Holmstrom?

Here’s what I mean by that question: can you explain where, exactly, this fits in to what they’ve learnt thus far? Is this consumer theory? Producer theory? Information asymmetry? All of the above? And more? Motivating students to learn about their (Hart and Holmstrom’s) work ought to be the easiest thing in the world, given that most of them will be on the labor market soon, but I very much doubt if this comes up as a point of even cursory discussion in an intro micro course. (And this goes without saying, if I’m wrong about this, yay!)

Paul Seabright brings up a list of other topics besides the example I just mentioned: two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design.

In addition, he also brings up applications of microeconomic theory: antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation, and speaks about how in terms of both the topics and their applications, econ students are being under-served.

The whole point of learning economics (micro or macro, or anything else, for that matter) is to be able to apply what you’ve learnt to the real world. An education in economics should, in other words, help you see the world like an economist does. And that would mean that one should be able to appreciate the world for what what works within it, and one should be able to identify problems with the world that economic theory might help you solve.

Unfortunately, the point of a micro course, more often than not, is simply to be able to solve enough problems so that one can score well in the semester end examination.

Which reminds me: I don’t think they learn about Michael Spence’s work either!

This really deserves a separate post, what I’m about to say next. But if I had to distill my post down to its essence: there are two ways to teach economics.

  1. Now that we’ve finished going through the textbook, let’s try and figure out if certain things about the world become more understandable.
  2. Here’s what the world looks like, and here is how economic theory helps.

The latter approach, in my experience, is so much better.

Leave a Reply