So Friday was my first day of class, which meant that in addition to introducing myself to my students (at which point I realized that I am not as interesting as they are) I also gave an overview of my philosophy on the course that I teach. For this audience (midcareer students coming back to the Kennedy School to get a Masters in Public Administration), I basically promise them that I will try to correct the wrongs committed by their Econ 101 professors in college. The typical objections that I hear from these students fall into the following categories:
- There is too much focus on math and not enough on intuition
- The models taught are not representative of the real world (or, new this year, the models are wrong, or, worse yet, economists are all wrong)
- Economics 101 doesn’t take politics or other practical considerations into account
You can imagine that, given the current state of the economy, these objections were louder than usual. (Though, in fairness, my students are very considerate and respectful of what economists have to offer. Perhaps they are still on their best behavior around me.) I did my best to (briefly) address each of these concerns, and I think it’s something that the general population could stand to hear as well.
Objection 1: too much math- I think I agree with my students on this point. Much of what is valuable in an introductory economics course is not dependent on the specific math of the models as much as on the intuition and the conclusions. In fact, the math often times just serves as a distraction to what is actually helpful to learn. If a student is going to move on to more advanced economics courses, it makes sense for her to go through the math, but for the casual economics student, not so much. In general, I think that students would be well-served if Economics 101 were to be split into different tracks for different students. (For example, I think that there is a good case to be made for a specific version of Econ 101 for music industry majors.)
Objection 2a: unrepresentative models- In other fields, it is well-understood that scientists make simplifying assumptions that may or may not be representative of the real world. For example, a physicist might simplify a model by assuming a lack of friction in order to draw conclusions about force and acceleration. (I know, I am totally butchering this, but bear with me.) If I then try to use that model to estimate how hard it is going to be to push the table at the front of the classroom from one side to the other, I am going to be in for a big surprise. (insert visual gag here) In physics, people seem to generally know better than to do this. In economics, they seem to try to shoehorn models in where they don’t necessarily belong. What’s the difference? My suspicion is that the underlying assumptions are not as clear in economics as they are in physics, so one of my priorities is making these assumptions explicit. Also, students need to learn not only the basic models but also how to extend the models to apply to specific scenarios.
Objection 2b: incorrect models- Again, there is a fine line of distinction between “wrong” and “applied where it shouldn’t be.” There is also a line between “wrong” and “economists don’t have crystal balls.” (Though maybe they do with with crystal balls. Hm…) To address this particular issue, I direct you to two sources. The first is an article written a few months ago by Greg Mankiw explaining what was going to change in Econ 101 as a result of the financial crisis. The short answer? Not much.
“Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.”
He goes on to explain in what subtle ways the course should and will change, and most of these ways are focused on the teaching of macroeconomics rather than microeconomics. In addition, my RA (who I am beginning to think is just a tad psychic) pointed me toward a story in The Economist entitled “What Went Wrong With Economics” that partially defends economists against the backlash of public perception:
“In its crudest form—the idea that economics as a whole is discredited—the current backlash has gone far too far. If ignorance allowed investors and politicians to exaggerate the virtues of economics, it now blinds them to its benefits. Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.
And if economics as a broad discipline deserves a robust defence, so does the free-market paradigm. Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism. Their logic seems to be that if economists got things wrong, then politicians will do better. That is a false—and dangerous—conclusion.”
I think that is very well put. Furthermore, the article goes on to clarify that most of the “wrongness” of economists was to be found among macroeconomists and financial economists. (hence the title of this post) Therefore, it is not justified to blithely purge everything you learned in your introductory micro courses, ok?
Objection 3: No practical considerations- Again, I think I side with my students here. Economists generally focus on a particular measure of efficiency that looks at the total dollar value created by a market (or destroyed by distortions to that market). The fundamental assumption underlying this measure is the idea that a dollar to one person is the same as a dollar to another person. This conveniently abstracts away the concept of who wins and who loses and labels as efficient any policy where the winners win more than the losers lose. (The justification is that the winners could transfer some value to the losers such that everyone would be made better off. Economists conveniently forget that it was usually attempted transfers that caused the inefficiency in the first place.) In addition, economists tend to shy away from equity (as in fairness, not necessarily equality) considerations in their analyses since discussions about equity tend to veer into non-objective value judgment territory. From a policy perspective, however, these equity considerations are very important, and there is usually a tradeoff to be had on the efficiency versus equity scale. (Sidenote: A student asked if efficiency and equity could ever move together. I gave a tentative yes, citing Corporate Social Responsibility initiatives that claimed to “do well by doing good.”)
Consider a quick example of the efficiency/equity tradeoff: Suppose the U.S. implemented a lump-sum tax whereby each household would pay a fixed amount regardless of how much income it had. This is the most efficient type of tax since it doesn’t give a disincentive to work. (The idea is that, because the tax is the same no matter what the household does, it doesn’t factor into decision-making processes.) That said, it doesn’t exactly pass the equity sniff test- does anyone out there really think that he should be paying the same amount in taxes as Bill Gates? How about Tom Cruise? Katie Couric? I think you get my point.
From a political perspective, it probably doesn’t matter that a lump-sum tax is efficient because it will likely never happen. That is not to say, however, that economic models have nothing to say in the discussion. It’s still important to understand how much efficiency is sacrificed for an increase in equity since this is how intelligent decisions are made. It’s admittedly a little frustrating, but sometimes economics doesn’t give you the answers, just the tools to analyze tradeoffs. But hey, it’s still better than nothing.
In short, students and readers of eocnomics need to be clear on what economics can and cannot offer. I will leave you with a typical response from me that I give in response to the question “When is the economy going to turn around?”
“Hm. I can tell you how markets function, and even how they fail to function, but unfortunately I cannot answer your specific question since I left my crystal ball at home. And no, despite the fact that I studied computer science, I cannot fix your hard drive.”