Home > Uncategorized > Reformulating the economics curriculum

Reformulating the economics curriculum

from Lars Syll

Having gone through a handful of the most frequently used textbooks of economics at the undergraduate level today, I can only conclude that the models that are presented in these modern mainstream textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent.

madiThat is, with something that has absolutely nothing to do with reality. And — worse still — something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972), Rolf Mantel (1976) and Gérard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equilibrium solution.

So what modern economics textbooks present to students are really models built on the assumption that an entire economy can be modelled as a representative actor and that this is a valid procedure. But it is not, as the Sonnenschein-Mantel-Debreu theorem irrevocably has shown.

Of course one could say that it is too difficult on undergraduate levels to show why the procedure is right and to defer it to master and doctoral courses. It could justifiably be reasoned that way — if what you teach your students is true, if The Law of Demand is generalizable to the market level, and the representative actor is a valid modelling abstraction! But in this case, it is demonstrably known to be false, and therefore this is nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hope that they will never run into Peano’s axioms of arithmetics.

For almost forty years mainstream economics itself has lived with a theorem that shows the impossibility of extending the microanalysis of consumer behaviour to the macro level (unless making patently and admittedly insane assumptions). Still after all these years pretending in their textbooks that this theorem does not exist — none of the textbooks I investigated even mention the existence of the Sonnenschein-Mantel-Debreu theorem — is really outrageous.

  1. August 24, 2018 at 2:46 am

    “a case of scandalous intellectual dishonesty” – amen.

  2. August 24, 2018 at 5:29 am

    There is a simple point of truth that you can teach even for high school students. It is based on two facts that you can observe in everyday life: (1) Most industrial goods and services are sold at a fixed price, set by producers or sellers. (2) You can buy those products as much quantity as you want anytime at the fixed price.

    Commodities whose volume of production you cannot change rapidly are exceptions (e.g. pictures of Picasso or most of agricultural products). You can make this finding as a quiz to your students. The most important exception is the financial commodities such as financial assets and real estates (FIRE economy). You can add that trades of financial assets are only changes of property rights (who owns which) and have no direct correlation with what you produce and consume (Real Economy).

    After these observations, you can teach two principles: (1) the principle of markup pricing and (2) the principle of effective demand (at the product level).

    For the markup pricing, you first teach this formula:
      price = (1 + markup rate) × (unit cost).
    You may remark that the markup rates differ in different industries, are determined mainly by the custom, and are influenced by the state of competition of the industry. You will also teach how to calculate the unit cost. You will teach that modern industrial production is an input-output relations with fixed coefficients for a given production technique. You may pick up the list of parts and components for a passenger car as an example.

    The principle of effective demand is not the principle of macroeconomics as Keynes (1936) defined it in Chapter 3 of the General Theory. Effective demand works for each product (See Chapter 20 Employment Function). Producers produce as much as products are sold.

    You should caution your students that it is the producers who adjust demand and supply and not the invisible hand often assumed in the so-called law of demand and supply. You should point out that the law of demand and supply is no more valid for industrial products. The role of prices is not that it adjust demand and supply but teach producers and consumers the state of technology.

    For a more advance course, you can teach that the prices do not change even if the demand changes as long as three conditions are satisfied (Minimal price theorem). First, demand remains within the capacity of fixed goods. Second, there is no shortage of labor powers. Third, primary resources are available as much as necessary.

    The merit of this introductory course into economics is that you can easily shift to macroeconomic arguments such as one that the shortage of aggregate demand causes involuntary unemployment inevitable. This occurs not because prices are sticky as New Keynesians contend. It occurs because the principle of effective demand works.

    See for more details my paper:
    Shiozawa, Y. 2016 The Revival of Classical Theory of Values. In Yokokawa et. al. (Eds.) The rejuvenation of Political Economy, Routledge. You cam read the draft version at
    https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

  3. Edward Ross
    August 24, 2018 at 10:27 am

    This is my third attempt to reply to Lars Syll’s blog reformulating economic curriculum.
    Over the last few last few months whenever the question has been raised by a number of concerned economists on the need the need for a new economic curriculum for students I have responded on the need for teaching all people how to think so that they are able evaluate what they are told against what they see. Furthermore from a logic formed from experience in the real world I believe teaching people how to think is the best way to support our democratic egalitarian society. Also I argue that if people are denied the right to think they are simply being indoctrinated into accepting the false assumptions of the ruling elite. If anyone asks why am I being so stubborn on this issue is because I see an urgent need to start teaching students and people how to think before attempting to confuse them with what may amount to irrelevant theory. My final plea is for all those economists who have already expressed their concern with this problem is to make a combined effort to address this important issue. Ted

    • August 24, 2018 at 3:35 pm

      Edward,

      I understand what you want to say. Lars Syll presents all kind of criticisms against mainstream economics. It is a brave struggle but he rarely presents any positive proposals, be it economic theory or education. I sometimes wonder if those criticizers do not have their own economics. Even if they don’t, they have the right to continue their criticism but I feel a bit sorry for them.

      You are right to say that people (students and teachers) “people are denied the right to think they are simply being indoctrinated into accepting the false assumptions.” However, it is arguable whether people can learn ” how to think” easily. If they can, economics has not gone astray for so long time. To redress (or to rebuild) economics needs deep theoretical work of specialists. Imagine those days just before Copernicus. Geocentrism had caught the mind of people (including astronomers) for more than one thousand years long. People could start to think in the Helliocentric system because a strong-spirited person like Copernicus wrote a book and explained why it is better to think with Sun at the center of the World.

      Economics is in a similar situation. It needs a Copernican revolution and the calculation of Kepler.

    • Rob Reno
      August 25, 2018 at 11:55 pm

      You might enjoy reading a book written by graduate students in economics who became disillusioned with mainstream economics when their professors and curriculum was utterly useless (and largely mute).

      See The Econocracy:
      https://www.amazon.com/dp/B01MU4KYSG/ref=cm_sw_r_cp_awdb_t1_c2DGBb2KFN26A

  4. Helen Sakho
    August 25, 2018 at 12:53 am

    This is just a brief note in addition to what I have already commented on yesterday and this morning. I hope Lars might take a look and offer a helping hand? I have no doubts whatsoever as to his personal integrity or trained and brilliant mind. I have already stated so here and elsewhere.

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