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Economics 101 is no longer cutting it

Re In defence of Economics 101 (Oct. 21): Our colleague at McGill University, Christopher Ragan, defends the way economics is taught in universities, and recommends readers to enlist in economics courses if they wish to learn about the real world. We find it intriguing to read such a defence of basic economics. In our opinion, there are deep problems with Economics 101 that cry out for a serious revamping of the way economics is currently being taught, since it provides students with a biased view of the real world, often with little appeal to history and to alternative paradigms in economics. With the exception of (most) economics classrooms, the perception of markets has changed dramatically since 2007, when the world economy was hit with the worst recession in more than 70 years. This experience taught us that bad economic policies have devastating effects. The lack of financial regulations and the fervent belief in unfettered markets have finally come home to roost, despite the fact that many in the economics profession persist in denying these were the cause of the crisis, and who continue to offer Nobel Prizes to those who promote the wisdom of unregulated markets.

Yet, the theories being taught in Economics 101, including the so-called efficient market hypothesis, cannot explain this crisis, and even worse tell us that such a crisis just cannot happen. No wonder the profession at large did not see it coming. So if we had to choose between a theory that can explain why women's haircuts are more expensive than men's (Ragan's example), and a theory that can adequately explain a financial crisis of such a magnitude, we would choose the latter.

Truth be told, Economics 101 is under attack from several places around the world. In Britain, a massive student-led protest has been under way over the past year, and students are demanding a "rethinking" of the way economics is taught. They want theories that reflect better the real world in which they live, a world that is prone to instability and crises, and where prices are not to be found at the intersection of some hypothetical supply and demand curves. Even our own Prime Minister Stephen Harper had pointed out in 2008 that the profession should take strict lessons from history.

But even putting the crisis aside, Economics 101 fails with respect to more mundane examples. For instance, textbooks tell us that expansionary fiscal policy and government deficits lead to inflation and/or higher rates of interest. Yet, since 2007, governments have incurred very large deficits, with rising debt ratios, but interest rates kept falling, despite dire warnings from rating agencies such as Moody's. As for inflation, which was supposed to rise with the increase in the size of the balance sheet of central banks, it has been rather tame since 2007 as well.

So while Paul Krugman believes, as does Chris Ragan, that "Econ 101 has done just fine," the truth is it simply has not.

Professors Marc Lavoie and Mario Seccareccia, University of Ottawa, and Associate Professor Louis-Philippe Rochon, Laurentian University


Missed opportunity for Canada Post?

Re There's room for entrepreneurs in the delivery of public services (Oct. 20): Canada Post has long maintained that mail delivery to the door is not profitable and is thus phasing the service out as if to say, "There's no point in flogging a dead horse." Mail delivery door to door is still a service. Those at the sending and receiving ends are customers.

The basic principle of business is to provide goods or services to consumers, relying on know-how and at a given price. But when the product or service deteriorates, customers turn away and the value of the firm itself deteriorates. At some point, if the problem isn't fixed, the enterprise loses all value and its shareholders lose all theirs.

This is what is happening at Canada Post, a company of which we are all shareholders. Canada Post is ours. How much are we losing as we stand by and watch this decline?

Attempts at restructuring new offerings and various cost-cutting measures have not worked. So, what are we to do? In this situation, a normal business would try to minimize operating losses even more. If that is not possible, the next logical step is to sell whatever of value the enterprise has left to someone who believes that there is still market value in the service to be provided.

Private entrepreneurs are interested in door-to-door mail distribution and are preparing to replace Canada Post. They want to "take the market" because they believe there is money to be made. So, as owners of Canada Post, are we missing a business opportunity by simply letting others fill the vacuum? An urgent decision needs to be taken if we do not want to lose whatever market value Canada Post still has to the private sector with nothing in return. Cynics will say that it is not worth anything any more, but this is wrong.

Daniel Paillé, Montreal


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