How to reform the teaching of economics

20 May, 2014 at 08:47 | Posted in Economics | 13 Comments

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 

13 Comments

  1. “How to reform the teaching of economics ”

    The best way to reform the teaching of economics is to say to prospective students of economics who are not mathematically oriented to go study something more productive so that economics can work at the end. Economics is a very hard subject that requires a high level understand of math. It is not a place to hide and a substitute for failures in Law, Physics and Engineering schools. For students reforming economics possibly means making it simpler but that cannot be the case. The study of economic theories should be part of philosophy departments, which are highly mathematical nowadays by the way, and the application of economics should be studied in Finance, Operation research and Statistics departments. Therefore, Economics schools, as they exist today, should be abolished: http://www.digitalcosmology.com/Blog/2014/02/12/a-call-to-action-abolish-economics-departments-now/

    • Keynes started a revolution that still counts yet in the General Theory we don’t find complicated maths or stats. Nowadays we have all the techniques and the computational power to build sophisticated models but the crisis was not predicted by these tools. The problem with economics is that is too much theoretical and the teaching is only about mainstream. History, sociology and politics should be subjects that help economists, because they have the human dimension that maths cannot express

      • The crisis was not predicted because the model assumes a free market but politicians institute laws to defeat that. I can remind you of the laws to relax standards for housing loans in the US. This is what created the problem and the models could not predict that because fundamental assumptions were violated. We should not expect any models to match reality when assumptions are violated.

        An example is the thinking in medieval years that Physics in fundamental simple and rely on principles like “natural place” and teleology. Now we know that Physics is very complicated mathematically. Just try to solve Navier -Stokes equations of the General Relativity ones. Physics would not have progresses if the attitude were “we do not need more math”.

        Politicians, especially socialists, do what they can to prove neoclassical economics wrong by enacting laws that violated their assumptions. One of these is the minimum wage increase. Note that the Swiss voted down an increase a few days ago. This shows why that country is so successful and the education levels of the people. High minimum wage creates involuntary unemployment because below it there can no legal hiring. Then, these socialists blame the neoclassical models for not predicting involuntary unemployment. It’s all politics mixed with ideology. This must stop.

      • Very nice form of to save authors of economic crisis from his responsability. There are several expedients in justice court in many US states where are established how finance thugs make multiple frauds to begin and continue crisis. Financial deregulation was promoted and ridden by big banks and politicians at their service. Big economic agents participate in each election to put his agents at charge. To assume existence of this class of actors with big power and money and oportunistic behavior make models irrelevant.

      • So you’re saying that neoclassical ecomics would be right if market imperfections were abolished. This is the usual conclusion of mainstream models, even if they take into account frictions. What they don’t consider is the historical process: unions were born to defend workers from the free market you advocate for. It’s socially unfeasible to realize the hypothesis pointed out in those models. Do you really think that politicians know DSGE and act with the purpose to make them fail?
        Moreover, physics is a hard science: you can do closed experiment there while in economics you can’t. A theory can be right for some periods and wrong in others. Think about the Phillips curve, for example.
        Finally, it’s not necessary true that an increase in minimum wages lead to unemployment.

    • “For students reforming economics possibly means making it simpler but this cannot be the case.”

      Students want to be taught realistic economics, as opposed to junk economics. I don’t know any students who want to see economics reformed because they’re bad at math but enjoy studying economics. Mathematics aside, it can be argued a gain in simplicity is achieved when theories pertain to the real world instead of parallel universes. Students want to see economics reformed but they are sick of being lied to and taught theories that promote social suffering. Finally, you mention an increasing amount of mathematics being used in philosophy departments, I find this very troubling.

      • “Finally, you mention an increasing amount of mathematics being used in philosophy departments, I find this very troubling.”

        I do not think it is troubling. It is the way to go. Math is the only means we have for modeling the world and its phenomena, including the economy. It is also an indisputable fact that math education is lacking below the level of adequacy required for students to understand these models. Just to give you an example, my 5th year high school text in math 30 years ago was way more advanced in many respects than senior math college texts. Too much pressure for normalizing scores in high schools has lowered the level significantly.

        ” Students want to see economics reformed but they are sick of being lied to and taught theories that promote social suffering.”

        I think this is an emotive approach to the problem. Math does not promote suffering, politics does that. If you institute a high corporate tax because you are looking for short-term budget gains, companies will move and people lose their jobs. This is not the fault of math models but of short-sighted politics. In the US as we speak, Pfizer wants to buy a UK company for $120 billion because they figured out that with a 34% corporate tax they will be in dire straits in 20 years. In England the corporate tax is 10%. These are inputs to the math models, not the output of them. Maybe you have it backwards and you may want to rethink it?

  2. Right, what we need right now is *more* math in economics.

    Funny how seldom it is pointed out in this connection that over the past 3 decades, the insane financialisation of the U.S. economy, and its equally insane remuneration scales, has siphoned off to Wall Street some of the best physicists, engineers, statisticians, computer programmers and mathematicians around. So whatever the quality of the math taught to economics Ph.D.s and used in economics journals, let it not be said that a lot of people who really know their freaking math haven’t tried their hand, extensively, for a long time, and often with a remarkably free hand, to conquer the world of finance and economics mathematically.

    And we all know how well that’s gone.

    The more intellectually honest and soul-searching ones end up sounding like Emanuel Derman, Paul Wilmott or Espen Gaarder Haug. The more cynical ones simply go along for the very lucrative ride. But whatever their attitudes to what(ever) it is they’re doing, I doubt many quants take their own models quite as seriously as financial economists do.

  3. The defeat of Keynes comes from his not acceptation of the world as is. England economy-world, like is showed for Braudel is out of equilibrium. trade unequal dry liquidity from colonies and peripheral dominated states and causes repetitive crisis that are true catastrophes in periphery and make damages also in center of system always minor. Braudel shows oportunistic behavior of capitalists and his action in several times pass beyond economic theories. Finantial bubbles are this kind of oportunistic behavior and are clear causes of crisis, unemployment, discomfort and uneasy, but don’t have explanation in economic rhetoric disguised as science.

    • This is what germany d9oes to the EU today with the euro. Destroying the periphery to maintain a high standard of living and surpluses.

  4. Some agent based models are very graphical and therefore easy to understand even if the mathematics and algorithms behind them are comlicated. I think ABMs could be useful tool to explain economic theory. People educate in physics and mathematics but no economics are exactly the people who trust the models too much. Few people wokring in the industry who are educated in physics understand the flawed reasoning underpining a lot of economics and are therefore not critical of economic models. I think a stronger focus on arbitrage models and numerical methods for economic students could allow economy students to replace physics educated people in the industry. This would be helpful to try to avoid another 2008.

    • Recently, was published that an news agency that distribute data on stocks and shares, have a select group of clients , major world banks, who received info some seconds or minutes before the normal subscriber. This is the reality behind difficult construction of economy model . Economic theory become apostle labor to achieve to reign on any clas of economic agents.

  5. To commnets by TOM:

    “What they don’t consider is the historical process: unions were born to defend workers from the free market you advocate for. ”

    I do not advocate anything. I am a philosopher. I try to find what the questions are.

    “It’s socially unfeasible to realize the hypothesis pointed out in those models. Do you really think that politicians know DSGE and act with the purpose to make them fail?”

    DSGE models reflect neoliberal policies and ideology and they do not have to know the math to implement policies that defeat their assumptions. Just raise taxes to corporations or pass a law to force banks to ease lending standards and you throw them of.

    “Moreover, physics is a hard science: you can do closed experiment there while in economics you can’t. ”

    Why not? Many countries, especially recently in Europe, have been the subject fo extensive experimentation, especially to find out if internal devaluation works. The experiments are also quite reproducible.

    “Finally, it’s not necessary true that an increase in minimum wages lead to unemployment.”

    Probably you are right but not in a globalized world but in some parallel universe where there is an empire that takes advantage of colonies, their resources and labor uner the application of extreme rule. In this world, if in manufacturing you increase minimum wage you lose jobs, anywhere. Only in services you can do that and that is why so many people in America want to work for McDonalds and 95% of people in Europe want to work for the government.


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