For Whom? Institutional Economics and Distributional Issues in the Economics Classroom

By Peterson, Janice | Journal of Economic Issues, June 1995 | Go to article overview

For Whom? Institutional Economics and Distributional Issues in the Economics Classroom


Peterson, Janice, Journal of Economic Issues


The need to turn our classrooms into a "scene for social action" and to engage our students in the critical analysis of economic problems and policies is perhaps nowhere more urgent than in the area of distributional issues. Yet, such issues are typically discussed in a very limited manner in "principles of economics" courses. This not only provides students of economics with a distorted view of the U.S. economy and current economic issues, but leaves them unprepared to analyze and respond to current policy debates.

The limited treatment of distributional issues in the traditional principles of economics course reflects the content and method of traditional (neoclassical) economic theory. The basic elements of "thinking like an economist" are generally defined in terms of neoclassical "core concepts," which determine the priorities of the principles of economics course and shape its content, methodology, and pedagogy.(1) This paper argues that addressing the limitations of these neoclassical core concepts is a necessary first step in setting the stage for a meaningful discussion of distributional issues in the economics classroom.

The focus of this paper is on the principles of microeconomics course. This paper seeks to illustrate how introducing institutional economics at the level of four "core concepts" can create a framework where distributional issues can be vigorously pursued.

Core Concepts: Traditional Economics

Definition of Economics

The definition of economics is critical in determining the conceptual framework and goals of the principles of economics course-determining what questions will be asked and how they will be addressed. The traditional definition of economics focuses on "rational" individual choice under conditions of scarcity. Economics is presented as the "science of choice"- the study of how individuals/societies allocate their "scarce resources" to satisfy alternative and competing "human wants." Constrained maximization, fundamental trade-offs, and opportunity costs become the focus of most introductions to the discipline.

The necessity of choice, imposed by scarcity, constitutes "the economic problem." This forces all societies to answer the "three economic questions": What goods and services should be produced? How should they be produced? and, For whom should they be produced? The first two economic questions are associated with the allocation of resources, while the third question is associated with the distribution of income. The traditional principles of microeconomics course focuses on how these questions are answered through the maximizing behavior of individual decision makers in the context of a market economy.

Performance Criteria

This definition of economics is associated with a very narrow set of performance criteria for evaluating economic outcomes. Efficiency is emphasized over other criteria and is defined in ways that set it in opposition to other goals such as equity. Economic efficiency is defined in terms of rational individual choice and market equilibria. Both allocative efficiency (concerned with what is produced) and technical efficiency (concerned with how it is produced) are achieved through the maximizing decisions of consumers and firms in competitive markets. Equity is associated with income distribution (for whom?) and redistribution. Often, it is simply stated that "equity concerns" are based in a society's notion of fairness, which stands outside the realm of economic analysis.

Economic efficiency is often discussed in terms of "Pareto-optimality"-- a situation where no one can be made better off without making someone else worse off. This effectively limits the discussion of distributional issues since any income redistribution can be seen as making one group worse off and therefore a violation of this principle. Thus, societies are confronted with one of the "fundamental trade-offs"-the trade-off between efficiency and equity. …

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