How Economics Should Be Taught

On this blog I criticise mainstream economics and how it is taught in colleges a lot. In fact that’s one of my main aims with the blog. However, rather than just always criticise and say how things shouldn’t be done, today I would like to put forward a few proposals. Now to list everything that should be taken out of economics would take many, many posts, so this will be a short general overview. It should also be said that the economics curriculum is in dire need of reform (and there are encouraging signs that a growing number of people realise this). For example, my lecturers would tell me that we could buy editions of textbooks either from before or after the 2008 recession; there was no real difference between them. When the greatest crisis in decades doesn’t cause any serious review, then you know we have a problem.

First, let me give a brief overview of how economics is taught (or at least was for me 2010-13). Of course there was a degree of variance depending on the lecturer and module, but there was a strong theme running through most of them (especially the core modules and microeconomics). Occasionally, just after explaining some theory, a lecturer would casually state, “By the way, that’s obviously not how the world works” and then continue on. When even the people teaching the topic don’t believe it, then you know you have a real problem. Looking back over my economic lecture notes and slides, there seem to be two core features of my economics education. They are perfect competition and mathematical questions.

2nd year Microeconomics was pretty much nothing else except solving these types of questions

2nd year Microeconomics was pretty much nothing else except solving these types of questions (No there is no time they would ever be useful)

The economy was almost always depicted as a place where supply always equalled demand; markets were efficient and maximised welfare. We were given numerous examples of how government intervention made everyone worse off (a common homework question was to calculate the deadweight loss of taxes or price controls). If there was time market failures might be mentioned but it would be emphasised how rare this was and how it could usually be solved by market forces. More than anything, there was a huge emphasis on how all economic issues could be represented by a demand and supply graph.

How I hate indifference curves

How I hate indifference curves

The second major part was mathematical equations that are, to be quite honest, useless. For example weeks would be spent on Pareto efficiency (the state where you can’t make one person better off without making someone else worse off), a hypothetical topic that deserves no more than 15 minutes. We would be given Cobb-Douglas functions to solve, a pointless exercise that no one would ever need outside the classroom. A particular bane of my student days was indifference curves. After years having to study them, I still see no point to them whatsoever (basically people want some stuff, let’s draw lines and solve equations). Essentially, half my time was spent solving equations that had nothing to do with the real world and would never come in use.

I still have no idea what any of this means (and its by no means the worst)

I still have no idea what any of this means (and its by no means the worst)

 

So the first change in economics would be to ditch the useless parts which take up an unfortunately large part of the curriculum. But what should we replace it with?

Firstly, instead of telling students what the “correct” answer is, students should be taught to figure it out themselves. In other words economics should be taught less like a mathematical or science course and more like a social science (there is a huge degree of snobbery among economists who believe comparisons with social sciences are an insult, this has definitely got to go). So instead of saying to students minimum wages are bad, calculate the deadweight loss in a purely abstract world, students should be told, well one group of economists believe minimum wages are bad for this reason, while others think they are good for this reason. Almost every part of economics has at least two viewpoints, these should be shown to students so they can make up their own mind, instead of only teaching one view and pretending it is the “correct” way. In exams I always had to choose between the answer based on how the world actually operated and the answer the lecturer was looking for.

Part of this problem was due to use of maths and multiple choice questions. In a maths question, there is only one right answer and usually only one right way of getting it. Likewise almost all my economics exams were multiple choice questions, which also promoted the view of only one right answer. If instead students had to explain the issues, this would promote a deeper engagement with economics and give more room for a diversity of viewpoints instead of just regurgitating the one in the textbook. After all, there is no one way of doing economics, no one simple reaction to every event. The current system promotes a narrow, tunnel vision view of the economy, which means there is a huge amount that is unseen.

Secondly, use evidence. I feel a bit silly having to say this, but if you read an economics textbook, there is no evidence or studies mentioned. Considering economists pride themselves on how scientific they supposedly are, this is an embarrassment. For example, every textbook describes prices and wages as being set when marginal supply equal marginal demand. There is no evidence that this is the case in the real world (outside a handful of areas). The evidence overwhelmingly shows that prices and wages are very rigid, yet this is never even mentioned in textbooks (you might get a hint of sticky prices if you are lucky). Economists may find it easier to work with marginal theory out of habit or because it can be stuck on a graph or run through a model, but we must deal with the world as it is, not how we wish it was.

Thirdly, be more open to other social sciences and build on their insights. Psychology has a lot to tell us about how people behaviour and especially how they make decisions (the growth of the field of behavioural economics is one of the most encouraging developments in economics). Sociology is often treated like the poor relative that economists are embarrassed to mention, but people do not act solely as profit or utility maximisers, we interact under conditions of social norms, that without the insight of sociologists, economists cannot explain. Those who fail to learn from history are doomed to repeat it, and the current recession holds many similarities with the Great Depression. Perhaps had more time been spent studying past bubbles and recessions we would have been less likely to think that “this time is different”. Rather than just studying the abstract theory, students should also look at what happened when those theories were put in practice.

So why doesn’t it change then? I think there are two main reasons. Firstly, inertia. People (especially Irish people) generally accept things the way they are and presume there must be a good reason for them. People presume that people much smarter than them have thought about the problem much more than they have so their solution is probably the best. They are the experts after all. If you think differently, it’s probably because you don’t understand them. Do you really think you’re smarter than the experts? Complaints are usually ignored as little more than students whinging about having to work. “Maybe if you spent less time drinking you would understand”. “You’re too young and naive, when you grow up, then you’ll understand.”

There is also the force of habit. Economists have spent years or even decades viewing economics through the lens of supply and demand, so much so that they forget that there’s any other way of doing it. Economists teach perfect competition, not because most of them like it (at least I hope not) but because that’s the way things have always been done. Everyone gets taught markets are efficient, it just seems the natural way of doing things.

Secondly, natural selection is at work. The students who don’t like the way economics is taught or find the theories ridiculous, do badly in exams, switch subjects or follow alternative career paths. The response of most of my friends to nonsense theories was to zone out and lose interest rather than try to change the system. It’s the students who love maths or think perfect competition is great that do well and become professors. The ones most likely to succeed are the ones least likely to change anything.

So in essence, economics needs to become more realistic. Colleges need to dump the blatantly unrealistic view of the world which only leads economists to solve the wrong questions. They need to throw out a lot of the mathematical equations which only scare people off without contributing to our understanding of the economy. Instead it should be replaced theories that describe how the world actually operates. It is no excuse to complain that the real world is too messy, we must adapt to suit it, instead of adapting the evidence to suit our theories. Students should be encouraged to think, debate and challenge viewpoints, instead of just memorising and repeating the “correct” answer. Economics should be a more pluralistic field that incorporates insights from other fields, rather than just imposing its one size fits all view of rational actors on others.

Basically economics needs to be brought into the real world.

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15 Comments

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15 responses to “How Economics Should Be Taught

  1. Being someone who is aiming to study economics at university next year, I find this perspective incredibly useful and a needed pinch of criticality to take with the immersion in economic ideology that will come throughout my studies.

  2. As always you are spot on. There is nothing inherently wrong with “idealized models,” models based upon features that do not exist, e.g. markets in which people have “perfect information”. Physics was parsed this way. One of the first important real world subjects for physicists (even before they were called physicists) was ballistics. Early attempts to figure out where a cannon/trebuchette shot would land ignored things like friction, aerodynamic drag, etc. But needing more precision, these factors were addressed theoretically so a complete picture could be had (and better accuracy, of course). So, how did the physicists know where to look for these “other factors”? Answer: by comparison of theoretical predictions with real outcomes. So, your recommendation for including real evidence is not just correct but quite overdue. (An aside: the two greatest driving factors of early European science were war and taxes both of which required greater and greater precision of measurement.)

    Comparisons with real events (case studies) would tell economists how closely various theories were to actual behavior, but more importantly it would tell them the nature of what’s missing. If the theory always provides higher estimates that reality, one goes looking for things that lower outcomes and ignore things that raise them (at least for a while) and so forth.

    The practice of economists whipping up their own little theories and not working to make other theories more workable shows that they have embraced the mathematics of physics (making themselves look smarter) but haven’t embrace the core processes that lead to real improvements.

    Carry on, young man, you inspire me.

    Steve Ruis
    Chicago, IL, USA

  3. Reblogged this on alittleecon and commented:
    This chimes with my experience of undergraduate economics. I studied from 2002-2005. It seems the crisis hasn’t changed much. I always hated micro too!

  4. In the real world money is created as a debt on a schedule and then most of it is captured by the rich as savings. The result is a mathematical imperative for ever increasing debt to banks.

    theory, math and evidence at:

    http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm

  5. Econ Student

    So what specific papers or ideas from other fields would you incorporate into the undergraduate economics curriculum? You denounce the math and assumptions that are relied upon in the classroom yet only vaguely suggest what those models should be replaced with. Which specific insights from sociology have economists neglected? Which ideas from behavioral economics should be taught in the classroom? Seminal behavioral papers like Shiller 1981 are often taught in the classroom, but rarely at the undergraduate level. Why? Because one must be familiar with the standard efficient financial markets model before reading a paper that deconstructs and tests it.

    Your entire post is full of straw man arguments about specific assumptions and models. Has it ever occurred to you that the reason perfect competition is taught in the classroom is not because it is an apt description of the way the world works, but because research about imperfect competition and antitrust regulation would be worthless without some hypothetical model against which actual industries could be compared? Has it ever occurred to you that the reason we learn how an efficient, frictionless market would function is so that we can identify exactly which frictions are present in the real world?

    You gripe about the mathematics used in undergraduate courses, yet the specific slide you posted involves simple manipulations of logarithms that could have been taken directly from a high school Algebra 2 assignment. I might consider your claims more seriously if you were talking about the mathematics used in macro papers being published today, but you’re essentially complaining about the use of any mathematics. You claim to support the use of empirical evidence in economics (which, by the way, has been included in almost every economics book I studied as an undergraduate: Samuelson & Nordhaus, Varian, Williamson,…) yet you denounce the tools that allow us to formalize and test theories. If you didn’t understand concepts as basic as indifference curves and the economic ideas that they represent (the preferences of an individual who prefers diversity in consumption could be represented using convex indifference curves, a fact used in almost every significant macro model taught at the undergraduate level), you simply did not study them enough.

    By the way, the use of certain functional forms like the Cobb-Douglas production function is not without justification. Here’s one specific paper that successfully fits such a production function to the software development industry: http://www.sciencedirect.com/science/article/pii/S0950584907001279
    On the other hand, here is another paper that rejects the same form for individual countries: http://www.pitt.edu/~jduffy/papers/jeg2.pdf
    Have you read either of these papers or ever investigated whether the Cobb-Douglas production function adequately models aggregate production in individual countries on your own? Of course not. You have no interest in actually changing the way economics is taught at the undergraduate level, as evidenced by the fact that you offer only vague criticisms of modern economics (“Human interaction is too complex to be modeled by equations! The assumption of rationality is flawed!”) and propose no specific replacement for the portion of the curriculum that you would do away with. You don’t want to change economics, you want to make noise and bother the status quo. Most of your grievances seem to be those of someone who walked out of their intermediate macro class in the middle of real business cycle theory and never bothered to come back for the New Keynesian part.

    Yes, the economy is complicated and no, there rarely is a definitive answer to the question “What will be the effect of X on Y in the real world?” Did you completely skip out on classes like econometrics whose sole purpose is to equip one with the tools to investigate questions like these? Given a model, there is only one answer to the question “What will be the effect of X on Y in the model when A,B,C,… are held constant?” Even if “but the data shows that A usually rises when X falls” is an astute observation, it’s not a sufficient answer to the question that was asked; that’s what research is for, but how could one conduct meaningful research on the effects of the minimum wage on employment without knowing how a basic supply and demand model works?

    Everything you have said leads me to believe one of two things: 1) You didn’t pay attention much in college and have rationalized that by pointing out the obvious fact that Econ 101 deals with an oversimplified version of the world (as it should; how are we supposed to understand business cycles if we don’t understand the most basic features of idealized supply and demand?), or 2) You went to a school with a poorly-structured economics curriculum. I find 2 hard to believe, as I went to a middle-tier school in the US ranked far below yours internationally and received a comprehensive economics education with entire classes devoted to concepts like market failures and externalities.

    • Econ Student wrote: “You denounce the math and assumptions that are relied upon in the classroom yet only vaguely suggest what those models should be replaced with. ”

      Since economics fails to take into account what money actually is, I suggest that the first model to examine is the inevitable dynamics of the banking system itself.

      Perhaps econ student can refute the simple theorem posed here, based on the evidence from a very familiar chart.

      http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm

    • “Has it ever occurred to you that the reason perfect competition is taught in the classroom is not because it is an apt description of the way the world works, but because research about imperfect competition and antitrust regulation would be worthless without some hypothetical model against which actual industries could be compared? Has it ever occurred to you that the reason we learn how an efficient, frictionless market would function is so that we can identify exactly which frictions are present in the real world?”

      Has it ever occurred to you that a ‘perfect’ market has absolutely no real world relevance and that the world may function so differently to neoclassical theory that it is not worthwhile to talk about which ‘frictions’ are responsible for the economy not behaving like the model? There’s no need to invoke an imaginary, idealised market when discussing policy – people managed it before modern economics came about, and those who don’t study economics still do.

      In fact, so-called ‘perfect’ competition is really just a normative vision for how society should be, one based on certain presuppositions about individual self interest and the goal of efficiency. Other normative visions exist, and most of them do not rely on such an unnecessary level of abstraction or cloak their value judgements in nonsensical theoretical concepts like utility and Pareto. Perfect competition is such a joke and the fact economics still uses as a baseline, after 100 years, is incredibly revealing for the inertia of the discipline.

    • This is a great example of why economics is so slow to reform. Note the arrogant tone and general underlying implication that the reason I’m criticising economics is that I’m not smart enough to understand.

      “Which specific insights from sociology have economists neglected?”
      For example economics often treats its actors as though they are solely concerned with making money and living in an isolated bubble without any regard to the society around them. There are obvious reasons why this is not the case and plenty of examples where people are willing to sacrifice their self-interest for others. Or where people will do for free what they will not do for money.

      “Which ideas from behavioral economics should be taught in the classroom?”
      That list is far to long for any blog post, but there is a huge world of heuristics and biases in human behaviour that it is silly for economists to ignore or merely include as a side topic.

      “Has it ever occurred to you that the reason we learn how an efficient, frictionless market would function is so that we can identify exactly which frictions are present in the real world?”

      If perfect competition was merely a building block onto how economies really work, then I wouldn’t mind. But we don’t get too far beyond them. The discussion of market failures is very limited and usually kept to the end if there is time. In fact perfect competition is taught as if it were true, not just a simplification to be later discarded.

      “I might consider your claims more seriously if you were talking about the mathematics used in macro papers being published today”

      You do realise that I am speaking about economics as taught in universities and experienced by about 99% of people, not economics as practiced by professionals in academic papers?

      “Have you read either of these papers or ever investigated whether the Cobb-Douglas production function adequately models aggregate production in individual countries on your own? Of course not.”

      Have I ever read these obscure papers? No I have not. It is interesting that you linked a paper that effectively states that Cobb-Douglas is not a true reflection of how economies function. I’m not sure how that was supposed to help your case.

      “Most of your grievances seem to be those of someone who walked out of their intermediate macro class in the middle of real business cycle theory and never bothered to come back for the New Keynesian part.”

      I’ve seen New Keynesian economics and its nothing to get excited about. Its no saving grace and still suffers from many of the same problems as New Classical economics (though to a lesser extent).

      “Did you completely skip out on classes like econometrics whose sole purpose is to equip one with the tools to investigate questions like these?”

      No I stayed from them and saw how ineffective they were at actually solving these problems and the wide range of assumptions that had to made. Econometrics focuses too much on what can be answered rather than what should be.

      “how could one conduct meaningful research on the effects of the minimum wage on employment without knowing how a basic supply and demand model works?”

      But what if supply and demand doesn’t explain labour markets? What if minimum wages don’t cause the predicted unemployment because supply and demand is not an accurate description of reality?

  6. Chris T

    Robert, please keep in touch with what Steve Keen is trying to do in Kingston U in London. You should also link to his blog. Have you read his book? He is a kindred spirit to you.

    • Yes I’ve been following Steve Keen for a good while. Debunking Economics is one of my all time favourite books and really influenced my view of economics.

      • Chris T

        He is a friend and I want to introduce you to him. If you are going to do a Masters, don’t even think about any where else. You have a talent for explaining things simply and clearly. Go and do a PhD at Kingston. He is looking for talent to build his new centre for heterodox economics and you fit the bill. Assuming we can get you a scholarship for uni, we just need to set you up with a job in London. Hmm…let me think. Interested?

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