A recent post by blogger Tony Yates presents an opportunity for us to give a brief clarification of what we would like to see on the economics curriculum, and to debunk some common myths that seem to circulate among mainstream economists about campaigns like ours. This will only be a whistle-stop tour of the kind of stuff we’d like to see taught; over time, we hope to develop a more comprehensive outline of a post-crash curriculum.
Anti-Maths?
Critics of economics are often thought to be anti-maths (with the underlying implication that they are simply not clever enough to understand maths or economics). However, although we believe mathematics on its own does not lend a theory credibility – and that contemporary economic models seem to have sacrificed too much relevance in the name of mathematical tractability – we are not at all anti-mathematics. In fact, a lot of the mathematics taught on undergraduate and even graduate economics courses is quite dated and simplistic (eg linear equations; stochastic, normally distributed shocks). This is the kind of stuff natural scientists abandoned when they realised how complex and unpredictable the world can be (see Phillip Mirowski on this).
This is why we would strongly endorse a link up with our mathematics department to teach ordinary differential equations – as well as models which utilise them, such as Richard Goodwin’s model of class struggle – to economics students so that they may gain a better understanding of dynamic systems, rather than simply using comparative statics with unique equilibrium solutions. Economics students could also be taught basic programming packages such as MATLAB – mathematics and engineering students currently are – so that they could work with or at least prepare for various comprehensive dynamic models: Steve Keen’s Minsky Model; Agent-Based Computational Economics; Stock Flow-Consistent models in the vein of Godley & Lavoie. There is also graph theory, a mathematical method used in complexity and evolutionary economics which offers an alternative path to the ‘set theory’ based methods of mainstream economics. This emphasises discontinuities and emergent properties over smooth, differentiable functions and microfoundations.**
Alternative Schools of Economics
Probably epitomising the way economists view the existence of heterodox economics, Yates states that “most, but not all, of what I have encountered is not much better than pub talk”. Diane Coyle similarly responded to our call for pluralism by effectively defining pluralism so as to exclude heterodox views. Our reply to this kind of argument would be that economists actually need to engage heterodox theories before they can honestly dismiss them. Here are just a few examples of the kind of theories which could easily be taught on an undergraduate economics curriculum:
- Kaleckian models of the labour market*, where the level of employment is determined by aggregate demand rather than the interaction of demand and supply in particular markets (pedagogically, this is quite doable as the basic concepts are similar to the standard demand-supply model);
- Marxist models of the business cycle, where labour-saving technological change reduces the economy-wide rate of profit, resulting in lower investment, bubbles and crises;
- Minsky’s Financial Instability Hypothesis (FIH), which details how investors may be misled by successful investments during a moderate phase, overextending themselves and creating the conditions for the next bubble/crash.
- The Relative Income Hypothesis, where a consumer’s level and type of expenditure is set by community-wide norms, rather than their permanent income;
- Cost-plus theories of firm pricing*, which are almost irrefutably a better working description of how firms set prices than the marginalist alternative: the average unit cost, plus a mark up for profit. There are numerous theories for how the mark up itself is determined, including a target rate of return, firm growth or even a historical norm;
- Endogenous money* (and while we’re here, how to read a balance sheet/basic accounting practices). Even mainstream economists acknowledge that the conventional ‘money multiplier’ model taught in textbooks is not a sound description of the financial system, so this one should be a no brainer.
People have been producing these kinds of fleshed out, often mathematical (!) alternatives to mainstream theory for decades, as well as the relevant empirical evidence. We don’t see why they don’t at least deserve a seat at the table, and economists haven’t given us any reason to believe so.
History/History of Thought
Unlike physical reality (as far as we know), social reality changes. This means that in the social sciences it is often useful and illuminating to understand the history of a period from which ideas emerged. Adam Smith sought to understand the rising productivity during the industrial revolution; Marx sought to understand the misery it entailed for the working class; Keynes sought to understand the Great Depression and how mass unemployment persisted. Contemporary economists are currently busy devising or applying theories to understand why recovery since 2008 has been so limited and anaemic. Each period throws up unique (though sometimes similar) questions, and the theories that economists and other social scientists devise reflect these questions. Understanding both the history and the theories which came out of it helps students to understand why and when theories should be applied, what questions they are intended to answer and most importantly when they are no longer relevant.
A deeper understanding of history also helps to shield students from myopia. Those economists who warned of the possibility of a financial crisis often relied on their knowledge of past crises to shield them from the euphoria during the so-called ‘Great Moderation’. In fact, the aforementioned FIH teaches that tranquil periods may disguise bigger problems with the economy, which demonstrates how a combination of both history and alternative perspectives could have helped economists in the run up to the crisis (Steve Keen in particular utilised this reasoning to warn of an impending crisis). Finally, a good first hand understanding of major thinkers prevents economists from missing important insights and then reinventing the wheel. While it’s surely unrealistic to expect students to pore through these 900 page tomes themselves, expecting lecturers to have a good first-hand understanding of thinkers relevant to their area of expertise seems fair to us.
Conclusion
We are not simply looking for qualitative ‘fluff’ to be added to existing economics curriculums. What we are looking for is an approach which combines history, theory, empirical evidence and formal modelling to demonstrate to students how economics can illuminate important problems. This naturally gives students a perspective where there is often not a clear right answer, but each theory has advantages and drawbacks depending on what aspect of the problem you are trying to understand, the context of the problem and any ethical or political assumptions you may hold. Such a perspective would help to shield students from a wooden insistence that economics education can only consist of regurgitating abstract theory. If economists cannot see that this kind of format is feasible, they need look no further than the voluntary ‘Bubbles, Panics & Crashes‘ module we ran last year.
*Details of those theories marked with an asterisk can be found in Marc Lavoie’s Introduction to post-Keynesian Economics
**For more detail on graph theory, see Jason Pott’s The New Evolutionary Microeconomics