Home > teaching > How to reform the teaching of economics

How to reform the teaching of economics

from Lars Syll

To what extent has – or should – the teaching of economics be modified in the light of the current economic crisis? … For macroeconomists in particular, the reaction has been to suggest that modifications of existing models to take account of ‘frictions’ or ‘imperfections’ will be enough …

However, other economists such as myself feel that we have finally reached the turning point in economics where we have to radically change the way we conceive of and model the economy … Rather than making steady progress towards explaining economic phenomena professional economists have been locked into a narrow vision of the economy. We constantly make more and more sophisticated models within that vision until, as Bob Solow put it, ‘the uninitiated peasant is left wondering what planet he or she is on’ …

Every student in economics is faced with the model of the isolated optimising individual who makes his choices within the constraints imposed by the market. Somehow, the axioms of rationality imposed on this individual are not very convincing … But the student is told that the aim of the exercise is to show that there is an equilibrium, there can be prices that will clear all markets simultaneously. And, furthermore, the student is taught that such an equilibrium has desirable welfare properties. Importantly, the student is told that since the 1970s it has been known that whilst such a system of equilibrium prices may exist, we cannot show that the economy would ever reach an equilibrium nor that such an equilibrium is unique.

The student then moves on to macroeconomics and is told that the aggregate economy or market behaves just like the average individual she has just studied. She is not told that these general models in fact poorly reflect reality. For the macroeconomist, this is a boon since he can now analyse the aggregate allocations in an economy as though they were the result of the rational choices made by one individual. The student may find this even more difficult to swallow when she is aware that peoples’ preferences, choices and forecasts are often influenced by those of the other participants in the economy. Students take a long time to accept the idea that the economy’s choices can be assimilated to those of one individual …

We owe it to our students to point out difficulties with the structure and assumptions of our theory. Although we are still far from a paradigm shift, in the longer run the paradigm will inevitably change. We would all do well to remember that current economic thought will one day be taught as history of economic thought.

Alan Kirman

 

  1. May 21, 2014 at 8:50 pm

    “we cannot show that the economy would ever reach an equilibrium nor that such an equilibrium is unique.”

    There is a simple test for whether the equilibrium exists and is unique. Check the per capita GDP of the US and the Philipines. If they are the same, then that supports the unique equilibrium hypothesis. If they are different, then you must prove that the “For a given country” part of the hypothesis includes only details that are intrinsically different for the US and the Phillipines and you must re-write the equilibrium hypothesis to explain exactly how it handles differing inputs from the US and the Philipines or you must discard this.

    In fact, reforming economics education should start with the following litmus test. If your theory predicts that growth under the economic policies of 1920-1932 (actual result 10% or less) will be greater than the growth under the economic policies of 1933-1945 (actual result, 10% a year, or about 190% total), then most charitably, the theory fails when it is needed most and therefore must be discarded.

    When you rule out the obviously false, then we will have a much cleaner playing field to explore.

  2. May 22, 2014 at 12:10 am

    Is the objective of the study of economics primarily to make models of an economy?

    Personally, I’d rather economics as if people mattered..

    Students should be trained to ask serious ethical questions, such as “what is the moral basis for private property?, “does the environment matter?”, “growth at what social cost?”, “should the government intervene?”, “who gains and who loses from this policy?”

    When Queen Elizabeth II asked why no one saw the 2008 financial crisis coming, she was on to something. We were not asking the right questions.

  3. robert r locke
    May 22, 2014 at 6:08 am

    Reform of the teaching of economics: the nation state & human capital

    David Levi-Faur, points out that “in modern terminology we may say that Friedrich List emphasized the importance of human capital in economic development, which has been neglected in mainstream economic theory.”

    Even when it was finally introduced into UK & US economics and their establisihment followers, “in the 1960s it received an individualistic interpretation that hardly did justice to the important role of the state and nationalist movements in building a mass system of education – not as a response to individuals, or to a market-driven demand for education, but as an elite effort to educate (and mobilize) the
    masses. On the basis of the concept of productive powers, List was
    able to offer an analysis that connected government educational policies
    and the notion of human capital with the desired outcome of economic
    development. List was able to distinguish between the characterizations
    or outcomes of development and the causes of development. (Friedrich List and the political economy of the nation-state. (article in the Review of International Political Economy 4:1 Spring 1997: 154–178).

    As a consequence, today, as David Levi-Faur put it,

    It is possible to identify two concepts of economic development,
    one that stresses material factors and another that emphasizes
    politics and human capital. These two concepts are embedded in the
    current popular notion of globalization. Globalization…implies that certain economic processes, often understood as unavoidable imperatives, carry human society towards economic and
    political reorganization on a global scale. This interpretation of globalization
    is materialistic – it neglects human capital and the role of
    government in economic development. It is a Smithian or a laissez-faire
    concept of globalization as it associates globalization with the economic
    processes of accumulation and the division of labour. According to this
    view we are now in a new stage of economic development, where the
    movement towards a more efficient (i.e. global) accumulation of capital
    and division of labour will create favourable conditions for the setting
    of a new global–political order. This new order will then diminish (or
    at least minimize) the economic roles of the state and will also reinforce
    the laissez-faire conceptions of the economic role of government.
    A second notion of globalization, Listian or that of economic nationalism,
    may also be introduced. This notion stresses that the forces of
    globalization are products of the augmentation of mental capital, a
    learning process which includes the creation of new forms of knowledge
    as well as the products of new forms of political organization. The
    nation-state in this interpretation has a crucial role in promoting, guiding
    and regulating the process of globalization. The nation-state is crucial
    to the process of globalization as it nurtures it, protects it and gives it
    meaning. (p. 160).

    Which view is correct? People argue about it a lot in political science and sociology but not in economics, they don’t argue about it much at all. They are concerned with “the isolated optimizing individual making his/her choices within the constraint imposed by the market.” The quality and quantity of the human capital the isolated individual represents is mostly ignored because the assumption is that the market provides it when it is needed. And if it doesn’t.
    For most of the developing world caught up in the geopolitical realities of nation-state rivalries, this kind of economics is crap. If the reform of economics does not look at the formation of human capital from the second, a Listian perspective, then the reform is crap.

    • May 23, 2014 at 11:05 am

      Dear Robert,

      I quite agree with you, and to my knowledge David Levi-Faur was one of the few (outside the German speaking world) who understood the depth of Friedrich List’s arguments.
      Another who understood is Chris Freeman with his report to the OECD in 1982 (published 2003): ‘Technological infrastructure and international competitiveness’, available online: http://www.sinal.redesist.ie.ufrj.br/globelics/pdfs/GLOBELICS_0079_Freeman.pdf
      Freeman was the creator of the concept “National Innovation Systems”, and claimed that this was just another name for what list described in his books.
      Still, some English-speakers (with a nose for realities and amusingly not economists) understood him also before this, e.g. the British political leader and imperial strategist Leo Amery in his ‘The Fundamental Fallacies of Free Trade’ (1906).
      Defenders of mainstream economics would argue against you that you are very wrong. Economics has indeed progressed and take great interest in human capital and the like. And they are right, there are many such studies, although the bias towards individualism remains. A somewhat larger problem remains though … these studies tend not to trickle down into how economics is being taught, with all the implications that has. I dug into this in my dissertation, and used e.g. the Presidential Advisor (under GW Bush) and “best selling” text-book author, Gregory Mankiw, a Professor at Harvard,
      Allow me to quote from my dissertation – on List and Mental Capital (available online for free next week):

      “Starting in the 1960s, there has been extensive work done around the concept of ‘Human Capital’, following the pioneering works of Theodore Schultz (Cf. The Economic Value of Education, Schultz, 1963) and the Nobel Laureate Gary Becker (Cf. Human Capital … with Special Reference to Education, Becker, 1964). They both focused on education as an investment, as List did more than one century earlier.
      These rather belated efforts to include immaterial- or non-manual work, have in economics increasingly resulted in growth models that have broaden the term ‘capital’ to include knowledge- and human capital. Nevertheless, as in common in economics, these growth models have only sluggishly found their way into standard textbooks, indicating their rather ad-hoc nature to the core of economic theory.
      For instance, the standard textbook by Dornbusch and Fischer does not mention this at all in the 1978 edition, whereas Mankiw’s later edition from 2002, does mention human capital but briefly and superficially.
      In more detail: C. E. Ferguson and J. P. Gould’s Microeconomic Theory from 1975 does not mention human capital at all (Cf. Ferguson and Gould, 1975). Hugh Gravelle and Ray Rees’s Microeconomics, from 1981 spend one page of over 600 pages, on the difference between human capital and physical capital. But they do not at all evaluate the importance of human capital or how to promote it (Cf. Gravelle and Rees, 1981). Macroeconomics, by Rudiger Dornbusch and Stanley Fisher in 1978, does not mention human capital at all (Cf. Dornbusch and Fisher, 1978).
      N. Gregory Mankiw’s textbook Microeconomics, discusses human capital on four pages, but solely from an individualistic angle and he focuses singularly on the effect on wages, not on the national effects. He spends just as much text on the role of education as a signal of achievement for the individual person, as he spends on the role of general education for society (Cf. Mankiw, 2006, p. 407). ”

      (from ‘Friedrich List’s Heart, Wit and Will: Mental Capital as the Productive Force of Progress’)

      • robert r locke
        May 23, 2014 at 4:01 pm

        Thank you Arno. One of the problems economics faces is the way universities are structured. Human capital seems to be associated with the activities of the nation state and thus lies in the province of political science. If economics is to be reformed it cannot be left to departments of economics and business schools; it must be structured into a new university. This aside from the way economics is taught and appreciated in various nations.

  4. Ack Nice
    May 22, 2014 at 2:53 pm

    ‘the uninitiated peasant is left wondering what planet he or she is on’ …

    Urgent to the Federation of Galactic Councils
    Re: Survival of planet Earth, solar system ExB213, galaxy MaDas/5

    Situation critical; very close to destruction; request immediate intervention; wealthpower inequity factor is 1,000,000,000 [one billion] and rising; most powerful species is victim of bigpicture blindness; cannot see the overall situation, has lost ability to conceive fairpay, is committing suicide by overpayunderpay; this species has technology and weapons capable of destroying entire planet 60 times over; please send emergency response team ASAP; code 10; need equipment for disabling uranium-based bombs; repeat: extreme inequity increasing exponentially, driving violence to infinity; planet could burn at any moment; species has very confused and self-harming ideas about work and wealth; self-destruction is rampant since reward and sacrifice were divorced; species lacks conscious perception of value of justice and of connection of injustice and violence; recommend you send 1000 indestructible teachers; species has driven itself mad; most unable to overcome inertia, many vulnerable to psychosis and panic mentality; obedience to illogical custom and convention is solidified; submission to accepted ideas is extreme; sense of alarm at situation is extremely slight; recommend extreme caution; planet is worth saving, has some interesting lifeforms

    • May 22, 2014 at 3:08 pm

      And the art, don’t forget to beam up the art and the artists!

      • Ack Nice
        May 22, 2014 at 4:02 pm

        I have days when I wonder if cellphones will dance before we agree to feed the starving, days when I wonder if our epitaph will read: Here lies Humanity – they thought to the bitter end they could pick and choose which bits of their reality they would face, days when I wonder if perhaps the economicsanity revolution has actually to be danced into human heads. I sometimes write heartfelt lovepoems to Humanity on those days. Like the one above and like this one, which is disguised as a terribly rude wakeup call:

        SCUTTLE THE ARK – memo to Noah:

        the human species has driven itself insanely far from realism thus currently has no future

        extreme genosadism has been normalized and formalized on planet Earth

        a thousand ways to legally steal trillions from the working poor are globally enshrined

        pay for near-equal working now ranges from $1000 a lifetime to $1000 a second

        only worldwork makes world wealth – yet money rakes money is everywhere applauded

        wealthpower giants’ overfortunes are viscerally defended, not universally condemned

        the very few wise voices counseling the necessity to re-adjustice worldwealth have lost the battle to be heard in time

        recipients of societies’ self-harming, mad, over-generosity are called philanthropists when they return a fraction of the wealth they stole with everyone’s blessing

        egalitarians who have lost all appetite for chaos, violence, and crises are hated, vilified, ignored on every continent by the sub-rational majority

        people are disgusting for their bovine acquiescence to dysfunctional, obsolete overpayunderpay economics

        they are disgusting for not being horrified by the extreme horrors this causes

        they are disgusting for a million trivial tv shows amidst the horrors

        they are disgusting for a billion trivial conversations amidst the horrors

        they are disgusting for not being in earnest to get out of the mess

        they are disgusting for actively ignoring their ubiquitous knowledge that money is power so they can keep on shoveling overpower to the least scrupulous

        they are disgusting for not picking up on the hints that have been thrown out to them

        they are disgusting for fiddling while the world burns

        they are disgusting for their vanity, their self-flattery, their egotism, their prejudice, their violent beliefs

        they are disgusting for their denial, for their facile head in the sand behaviour, for the poverty of their horizons

        they are disgusting for their epic lack of shame at not being fair

        they are disgusting for thinking they have some right to go on seeking agreement on answers to all the wrong questions

        they are disgusting for their failure to prioritize sanely

        they are disgusting for straining gnats whilst swallowing the camel of overpay

        they are disgusting for using division of labor as an excuse to allow overpayunderpay

        they are disgusting for keeping fairpay justice in chains in the darkest dungeon

        they are disgusting for their epic failure to install simple mechanisms to counter for the ceaseless, automatic drift of wealth from earners to non-earners

        they are disgusting for their avoidance of getting real and going after the root of all horrors

        they are disgusting for their devotion to silence on superextreme economic unjustice

        they are disgusting for their overpowering love of having the chance to have otherearned wealth

        they are disgusting for their selfdestruction

        they are disgusting for many reasons there is no longer any point in listing

        most of all they are disgusting for erecting a wealthpoverty, masterslave situation whenever they have an egalitarian opportunity so they can indulge their taste for sadomasochism for a few centuries and then when they get tired of that, have a killfest, and then do it all again

        Scuttle the Ark, Noah

        Scuttle the Ark

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