Ronald Coase on Blackboard Economics

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Anyone who has taken an introductory economics course has marveled at how easy it is to suss out the effects of different policies simply by manipulating the familiar intersecting Marshallian supply and demand curves. This geometric analysis is a useful tool for understanding how markets react to different types of changes. But using this approach to actually implement those changes in real life is another matter. Economics is a useful science, but it has its limits. This “blackboard economics,” as Ronald Coase calls it, exceeds those limits. In the introductory essay to his collection The Firm, the Market, and the Law, he explains (p. 19):

The policy under consideration is one which is implemented on the blackboard. All the information needed is assumed to be available and the teacher plays all the parts. He fixes prices, imposes taxes, and distributes subsidies (on the blackboard) to promote the general welfare. But there is no counterpart to the teacher within the real economic system.

Wise and humble words, often forgotten by economists who would rather be engineers.

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