As students walk into their first ECO 100: Introduction to Microeconomics lecture at Princeton, they are unknowingly stepping into a classroom where economic theory trumps economic reality. The tenor of the first lecture is that markets can generally be trusted and government usually gets in the way. This perspective, emphasizing the superiority of the free market, is the inevitable result of unrealistic assumptions that are taken for granted for most of the semester: that economies generally run on perfect competition, are composed of rational actors, people have complete free choice, and prices accurately reflect value.
These assumptions construct a worldview that isn’t even a general representation of reality and inherently lean towards a free-market capitalist ideology. This has dramatic implications for our understanding of the role of public policy.
In economics education, there’s a hidden battleground where theoretical assumptions clash with real-world complexities, and professors have to decide how and when to acknowledge nuance. In ECO 100’s second lecture, a curious assertion illuminated this conflict: the notion that a minimum wage above the “market” price of labor necessarily leads to a significantly higher level of unemployment, a notion that a wide variety of economic studies reject.
The reality about this is wisdom born of Princeton intellect. Back in 1994, then-Princeton professors David Card and Alan Krueger published a seminal study challenging the conventional wisdom of that time. They found no negative effect on employment when New Jersey raised its minimum wage compared to Pennsylvania, which didn’t. While the application of their methods has been debated, studies in the nearly 30 years since have confirmed the lack of association, a finding replicated internationally. The work was so groundbreaking that in 2021, Card won a Nobel Prize in economics for studies including this one, an honor that Krueger unfortunately did not live to see.
The reason that the class ignores Princeton professors’ own seminal work is that ECO 100, like many introductory courses, relies heavily on neoclassical supply-demand analysis. This framework, which relies on assumptions (perfect competition, rational actors, complete free choice, and price reflecting value) leads to conclusions such as the idea that setting a minimum wage above the “market equilibrium price” disrupts the labor market, leading to decreased demand for labor and increased unemployment. Yet these assumptions often diverge sharply from the messy realities of economic life.
Take the assumption of perfect competition. It’s a bedrock of neoclassical economic theory, claiming that no one company can set prices and that people can always choose the least expensive option. It has dramatic implications for policy: If competition is perfect, the “invisible hand” of the market will always reach the optimal allocation on its own. That means that any government intervention in the market would, by definition, be inefficient. This is a worldview in which the free market reigns supreme as the most efficient system.
However, as Card and Krueger’s study showed, these assumptions often fall short in explaining the real world — in ways that have massive implications for public policy and economic inequality. Monopolies and oligopolies, irrational consumer behavior, constraints on free choice due to poverty or lack of information — all these factors deviate meaningfully from the textbook models of market capitalism.
Of course, economic assumptions are important, especially in introductory classes, because they can simplify problems down to the 100-level. But, as Professor Alan Blinder and co-author William Baumol say: an assumption can be “a useful abstraction from annoying detail or a gross distortion of the facts.” In order to be useful, economic assumptions must approximate reality.
Unfortunately for ECO 100, its assumptions are not like those of Newtonian physics, holding in all but extreme cases. ECO 100’s market-capitalist assumptions rarely align with reality. In reality, monopolies and oligopolies reign. This assumption of rationality of actors is so frequently incorrect that there’s an entire field of economics — behavioral economics — dedicated to understanding what happens when rationality breaks down. In fact, a Princeton alumnus, Richard Thaler, won a Nobel Prize for breaking this ground! There is often no free choice in the market — the stark reality is that 12 percent of Americans live in poverty: they do not have unconstrained consumer choices. And price only accurately reflects value very rarely. Just look at the negative “externality” of fossil fuel emissions from buying gas — neither you nor the gas company pay for the carbon emissions.
And in ECO 100’s course structure, “market failures” like the existence of monopolies and oligopolies — in other words, the real world — are only touched on in the final weeks. In its current form, the class does not introduce students to microeconomics as a discipline, it uncritically teaches the principles of market capitalism.
Many of our most pressing public policy failures stem from these fundamental misunderstandings of economics. As Naomi Oreskes and Erik Conway write in their book The Big Myth, the real policy debate is about “well-regulated capitalism versus poorly-regulated capitalism,” where a minimum wage law is a canonical example of well-regulated capitalism. And academia is critical because, as they say, “ideas do not exist ex nihilo. They are developed, sustained, and promoted by people and institutions.” The ideas about the market that informed the policies that precipitated these disasters are propagated in ECO 100, a required prerequisite for majoring in the School of Public and International Affairs.
It doesn’t have to be this way. At UC Berkeley, introductory economics includes three weeks on market successes — enough to get the concept of markets and equilibrium — and ten weeks on market failures. And here at Princeton last fall, Professor Alan Blinder taught the introductory macroeconomics course, ECO 101, with a nuanced and accurate approach. Blinder’s model is to teach theory and show applications at the same time, focusing on examples where theory broke down or had to accommodate novel risks, like the 2008 financial crisis and the pandemic. The reason that we need economics to be taught this way is not just the theoretical value of nuance, or even the moral imperative to teach accurate information. This curriculum has real effects: Princeton students end up in positions of economic power and need to have the best, most rigorous, and most applicable education.
It’s time to change how microeconomics is taught in ECO 100. Beyond the narrow confines of market-capitalist dogma is a more realistic and necessary understanding of economic principles. As future policymakers, researchers, and entrepreneurs, Princeton students need an education grounded in both nuanced theory and the diverse and complex economic landscape beyond the fantasy of perfect capitalism.
Eleanor Clemans-Cope (she/her) is a sophomore from Rockville, Maryland intending to study economics. She spends her time making music with Princeton University Orchestra and the Triangle Club and good trouble with Divest Princeton. She can be reached on Twitter at @eleanorjcc or by email at eleanor.cc@princeton.edu.
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