Wednesday, October 10, 2012

Changing The Teaching Of Economics

There’s been a lot of criticism about the economics profession in the last 5-6 years. Why didn’t we forsee the Great Recession coming? Why is there continued debate on the best way out of this mess? Why is there such disagreement over specific policies, and for that matter, what has happened and is happening now? Is there in essence, something fundamentally wrong with economics?

There’s a new debate on VoxEU that aims to realise that old adage – physician, heal thyself – especially with reference to the teaching of economics and young economists (excerpt; emphasis added):

What’s the use of economics? Introduction to the Vox debate
Diane Coyle, 19 September 2012

If economics emerges from the Global Crisis unchanged, it will lose all credibility. That is certainly not the view of all economists, but many do think so…

…However, it is not obvious what shape an effective response to even well-founded criticisms could take…

…One starting point…is the teaching of economics, beginning with the undergraduate level…

…Some clear themes have emerged from the conference and the book. One is the extent of employer dissatisfaction with the teaching of economics in universities, for all that economics graduates remain highly employable…For example, the prevalence of poor communication skills is a common theme

…Perhaps more surprising is the consistent view among all the employers, as well as some of the academics, that undergraduates need to learn more about both economic history and the history of economic thought, and moreover to be made to pay attention to the economic conjuncture, to economic institutions, to the operation of actual markets in the economy and current policy debates

…A second theme is the way the crisis has given added urgency to some questions or doubts about economic methodology…

…Andrew Lo of MIT argues that mathematical techniques in economics only gain meaning from application to actual empirical questions and should be taught in that context. Paul Seabright of the Toulouse School of Economics says students must be taught not that economics is an ever more successful approach to true knowledge about how the economy works, but rather as an empirical investigation of an ever-evolving phenomenon. There was a strong consensus on the need to demote the role of theory and promote empiricism. As Andrew Lo expressed it: “We economists wish to explain 99% of all observable phenomena using three simple laws, like physicists do, but we have to settle instead for ninety-nine laws that explain only 3%, which is terribly frustrating.”…

…On the third area, the role of macroeconomics, there was little consensus, but rather a wide array of opinions...

However, when Benjamin Friedman of Harvard describes pre-crisis macro as “wrong headed” and Andrew Haldane of the Bank of England describes representative agent models with expectations reflecting fundamentals as “fundamentally ill-suited” to today’s worlds, it would take someone who is either very confident or very complacent not to reflect some of these doubts in what they teach the next generations of economists….

…Economists are in the best position to understand the intellectual power and rigour of our subject, and its ability to contribute to tackling the enormous range of challenges in problems in today’s world, not least the continuing financial and economic crisis. Any intellectually honest economist will acknowledge that the length and severity of the crisis demand at least a certain amount of professional introspection and self-evaluation. Many will agree that economics does need to change. Surely the education of young economists is the best place to start?

There’s quite a bit more, so I’d encourage any student or teacher of economics to read through the whole entry.

Somewhat coincidentally, I gave a presentation on pretty much this same subject last week, and without knowing it hit almost identical points, though probably without the same authority or eloquence – the need for good communication skills; the need to appreciate economic history and philosophy; some knowledge of the inner workings of markets and the financial sector.

What I would add to the list is a working knowledge of statistics (as in data construction, not the data itself); and more generally, better coordination between the academic world and the empirical world as well as a better way to disseminate economic research.

I’ve got more thoughts on this, but I need to let the ideas germinate for a while. Stay tuned.


  1. very true. the study economics, as in most other areas of specialization, lack the feel of the real world. the development of knowledge and its instruction are forever outpaced by the turn of events. this situation is made worse by other structural and human weaknesses in our universities, other institutions and social circumstances. i am looking forward to your full account on this issue, as on other issues as always. yours is a breath of fresh air. thanks - syed putra ahmad

    1. Tuan Syed,

      What I've been thinking of is really bridging the gap between the academic and the real world, specifically in preparing students for a working career, and I've been mulling over a few ideas on the best way to go about that.

      I don't think it's possible to solve all the related issues in any holistic manner, as we're looking at deep-seated problems in both academic preparation, student readiness, and employer expectations. So perhaps a piecemeal approach would be best, though not because it can be more effective (I suspect it won't), but because at least something is being done.

  2. Hi Hishamh,

    The reform of economics teaching is surely not possible in the coming years and it may also appear unnecessary. Similar to other disciplines, the economic models and the assumptions within it are the means for researchers to examine the reality by setting it as a benchmark.Mathematics should be viewed as a language equivalent to english for academics to express their thoughts since it is the only tool that comes with exact precision. While there is no perfect model available in this world, they can however be improved in terms of precision. Instead of delivering something that resembles the reality to students, they themselves should widen their reading scope particularly the methodological aspect of doing macro or micro since that's the only way to help you build up your own economic perspective to understand the world. EC

  3. @EC,

    I'm speaking from the perspective of a practitioner rather than a teacher, so bear that in mind:

    I absolutely agree that part of the onus is on the students to widen their reading, but the way economics teaching is delivered there's no way for them to realise that there's more than one framework out there.

    What we have in university is almost a pure economic orthodoxy of New Keynesian or New Classical thought - that's inherent in the way the profession is incentivised and structured. What you're suggesting would, I think, only apply if you accept that those two competing orthodoxies were the only way to think about economic issues.

    The big lesson of the Great Recession is that they are not, which is why economic history and philosophy would be useful - it provides the framework for students to investigate on their own.

    More than that, there is the issue of preparing econs graduates for the job market. There's the issue of communication skills which is common to many other fields, but there's also more than just methodological frameworks that are lacking.

    There's a real lack of knowledge on how economies actually work, which teaching can't improve because a lot of this stuff is either not taught at all, or missing from econ theory. Take shadow banking for instance, which involves non-monetary credit creation (and hence not included in monetary aggregates and royally screws up monetary policy rules). Or even the process of money creation in the first place, which every econs textbook I've ever read has got wrong.

    Then there's more practical stuff like index number theory, and understanding national accounts and balance of payments data.

    I'm not against the need for tweaking models for precision or the use of models in the first place, but that's not the only thing we need to do.