Review by SFI External Professor Suresh Naidu (Columbia University)
Over the past 40 years, the field of microeconomics has gone through a revolution in real-world applications, yet the theoretical models taught in Ph.D. coursework have been slow to catch up. In a new textbook, SFI Professor Sam Bowles and Weikai Chen, a professor of economics at Renmin University of China, present problem sets, exam questions, and detailed solutions based on a new approach to microeconomics. Allocation, Distribution, and Policy is an entry into a long-standing effort to build a new paradigm in economics. This book of Ph.D.-level problems in microeconomics elicits, in this reader, echoes of two ongoing long trends. One of these is the evolution of microeconomics as a discipline: the original 1961 Notes and Problems in Microeconomic Theory, by Bowles and Kendrick, was a tour of constrained optimization, applied to a variety of extremely stylized market situations. The other is more personal, as I was one of a long line of teaching assistants who wrote up solutions to Economics 700 problem sets, which Bowles taught at UMass-Amherst over 20 years ago. I recognized many of the problems in Allocation, Distribution and Policy as developing themes and ideas that Bowles introduced in his 2004 textbook Microeconomics: Behavior, Institutions, and Evolution, but also touching on the many developments since then.
Problem sets are one thing that distinguishes economics from most of the other social sciences. Even at the introductory level, to learn economics is to learn to solve problems, cranking through enough math that you develop an intuition for what is fundamental and what is contingent in an economic model. You learn to think like an economist: trying to strip things down to objectives and interactions between agents, be they individuals, classes, or nations. You build a repertoire of formal analogies — prisoner’s dilemma, battle of the sexes, Nash bargaining, tragedy of the commons, public goods, principal-agent problems, supply and demand — all of which become mental bicycles, devices that amplify human effort, for the practicing social scientist. Math is the vernacular, but the thought process is economics. After a bit of practice, thinking through the economics winds up being a short-cut through algebra, and, conversely, many math whizzes who initially thought economics was simple eventually learned that technical ability and economic intuition are only partially substitutable.
What is different about this particular book of problems is that they illustrate where economics is now, as opposed to where it was 40 years ago. The teaching of economics at the Ph.D. level is a set of canonical models at a very high level of abstraction: consumers and firms, game theory, general equilibrium, and mechanism design. But there is little that relates these models to the actual economy. The intuitions built by the exercises in this book, I'd argue, are a better complement to the empirical turn in economics, which has been driven by massive datasets and a focus on robust experimental methods, than either the abstract theorems of microeconomic theory or the perfect competition lens of price theory, and help get us closer to the real world.
Allocation, Distribution, and Policy is available for free online and for purchase as a printed textbook through Open Book Publishers.
This book was supported by the Emergent Political Economies Grant from the Omidyar Network to the Santa Fe Institute.