Many of the economic policy disasters of the last generation are easy to understand, once you realize that American policymakers continue to be guided by the superseded lessons of Econ 101, in the age of transnational supply chains, increasing-returns manufacturing, network-effects platforms and continental and global companies with hundreds of thousands of employees.
The people who rise to the top in any country, democratic or dictatorial, tend to be of above-average intelligence and ability, though not virtue. As a whole, every governing elite tends to be self-serving and power-hungry, but not all are suicidally inept. If a regime makes unforced errors—once, or again and again—then it is possible that those are errors of the head, not of the heart. A nation’s leadership may be like a brilliant pilot who flies a jet into a mountain in the fog because his map showed that he was over a plain when, in fact, he was in a mountain range.
The misleading map of reality upon which the US elite relies is “Econ 101”—a nickname for the dumbed-down popular version of academic neoclassical economics, which is pretty dumb to begin with. The world of Econ 101 is an idealized version of a pre-industrial agrarian society, in which competition among many small firms—family farms, blacksmiths, cobblers—is the norm and can be modeled with equations and thought experiments in the classroom, with no need to venture outside to look around. All product and labor markets are assumed to be competitive, and all monopolies are assumed to be unnatural and soon eliminated by competing firms, unless they are propped up by government favoritism.
The introduction of modern machinery to the rural Arcadia of Econ 101, however, brings with it new kinds of industries. Some industries—let’s call them factories—are characterized by increasing returns, which means that bigger firms are more productive than smaller ones. There are no mom-and-pop automobile companies. Other novel infrastructure and telecommunications industries—let’s call them networks—like railroads, telegraphs, telephone networks, or social-media platforms display network effects. A railroad web that connects 200 villages is not only more profitable, but also more efficient and financially stable and useful for commuters than a single line between two villages. So is a social-media platform that has hundreds of millions of business and individual users, instead of hundreds or dozens.
