A few weeks ago I had a brief exchange on Twitter with @unlearningecon about the possibility of introductory economics instruction going beyond teaching the neoclassical model of perfect competition and exploring alternatives. If I remember correctly our exchange didn’t get much beyond me saying that to do so is quite a challenge. Students can find it difficult enough to grasp the standard model, let alone alternatives to it. The challenge is compounded because some of the alternatives, at micro-level at least, are not as well worked through as the standard model. @unlearningecon didn’t feel it was so difficult.
Of course, I’ve no idea upon what @unlearningecon is basing his/her view. Our exchange was no more extensive than that. We didn’t pursue the issue. The view might be underpinned by plenty of experience. All I can say is that, in that case, the experience is different from mine.
For quite a while I have been thinking about what students should be introduced to when they are introduced to economics. The issue has become somewhat more high profile following the global financial crisis and the questioning of established economic paradigms.
Lasn’s recent book Meme Wars: the creative destruction of neoclassical economics is a direct call for economics students to challenge the bodies of knowledge they are presented with. It sees the student walkout from one of Greg Mankiw’s lectures a few years ago as inspirational. If instruction sticks to conventional models and makes no concession to real world relevance or fails to engage seriously with pressing social issues such as increased inequality or environmental sustainability then it should be contested. The book is a popularised version of many of the arguments presented somewhat more conventionally in books such as Hill and Myatt’s The economics anti-textbook, published in 2010.
After my exchange with @unlearningecon I felt the urge to jot down some further thoughts. Putting them here would have meant this ending up as a very long blogpost. So instead those thoughts have become a short paper, which I’ve bunged on to Scribd. You can access it below.
Is a Little Economics Dangerous?
Categories: Economics
My view:
One problem with teaching economic is that it is naturally a composite subject. On an economics course as a whole, it would be useful to have politics, sociology, history, accounting, business/management, psychology/behavioural, maths and maybe more. The classicals always thought of it as ‘political economy’ so maybe it should really be annexed back into another subject. But I’m not sure.
When you talk about saying businesses don’t use MC pricing I’m forced to wonder why you don’t just forget the MC=MR explanation and give a brief overview of what businesses actually do. Similar arguments could be applied to utility (just stick with basic empirical rules like the MPC and be done with it), perfect competition and even demand-supply.
In general, I think the reduction of things to two intersecting lines is simplistic (superseded even within neoclassical economics by DSGE, I suppose) and it doesn’t capture enough to pass the coherence/usefulness test. You probably know the problems with IS/LM. However, demand-supply has its own issues: two pieces of evidence are contradictory when interpreted inside the model. These are that increases in demand increase price, and that firms experience constant or decreasing returns to scale. This information alone is enough to throw serious doubts on whether the model should be taught at all.
If you think the theories are bad, but later theories are too complex, then just stick to empirics and a few stylised facts! Business cycles, the operation of the firm, a bit of economic history. Forget all that marginalist & utility stuff: students hate it and rightly regard it as practically useless.
“two pieces of evidence are contradictory when interpreted inside the model. These are that increases in demand increase price, and that firms experience constant or decreasing returns to scale. This information alone is enough to throw serious doubts on whether the model should be taught at all.”
erm, what?
@unlearningecon – Thanks for your detailed comment. It makes me realise that I missed a component of my argument, which is the reason for not jettisoning the perfect competition story entirely. So I’ve added a couple of paragaphs to the Scribd document. In the context of economics and policy, I think it is important for students to appreciate the sort of arguments – however simplistic or incoherent – that are used to justify policy directions as significant as the global thrust of privatisation/liberalisation or the marketisation of public services. [Of course you could argue that some of the early advocates of privatisation were actually Austrian economists by inclination, but that makes the story even more complex.] The point, for me, is to have a look at the theory and what it requires the world to be like in order to deliver the putative outcomes/benefits and then to explore how plausible that is. For example, how does the rhetoric of choice and competition in public services tally with what has been created, which is clearly a corporate economy. This opens up the possibility of considering whether, in practice, the models primarily do ideological rather than analytical work.
first-year micro does get beyond perfect competition, it should cover market power (monopolistic competition, oligopoly) game theory (strategic interactions between firms) etc. My old 1st year text book (Pindyck Rubinfeld 2001 edition) has sections on increasing returns to scale, monopsony, cartels and so on.
and when introducing the model of perfect competition, it says “apart from agriculture, few real world markets are perfectly competitive”.
@Luis Enrique – So did mine, apart from the game theory (it was a very long time ago!). I can’t remember whether it gave any indication of the prevalence of different types of market structures. The last intro book I looked at ran through each of the market structures but offered no judgement on their relative prevalence in practice. And even where the point about rarity of perfect competition in practice is made, are the implications of the point consistently worked through? Is the rest of the book structured around less than perfectly competitive models as being the most sensible basis for analysis? I’m not too sure that is a very common approach. (But I’m happy to be corrected.)
It may be that the problem I identify is particularly acute in areas where economics is being imported and applied. Most of the ‘economics of policy’ textbooks don’t devote huge amounts of space to introductory micro because they devote a fair chunk of space to applying the models. That may be on the assumption that students have already taken introductory micro. But that is quite often a false premise.
hmm, don’t know how to answer. The rest of the book I’m looking at is probably best described as progressing ever further away from perfect competition (it’s last chapters are on asymmetric information, externalities and public goods). As for the most sensible basis for analysis, it seems clear enough that perfect competition isn’t adequate in most contexts. I’m afraid I don’t know what economics of policy textbooks have in them, but most of the applied work I see (i.e. healthcare, utilities regulation etc.) is along way from perfect competition.
oh while I was flicking through this book I came across a section on rule of thumb pricing (on basis that managers don’t know what they’d need to profit max in theoretical fashion) which shows that a good rule (for producers with market power) applies a mark-up over marginal costs, the size of which is based on the elasticity of demand. Which might interested UE, if he’s reading.
I have to say that book isn’t one I’m familiar with, but it sounds quite interesting!
I agree with you entirely that its crucial we expose policy makers to more than the neoliberal model. I started an MSc at LSE this year and have no background in economics. I took a course on Feminist Economics (I’m studying Gender and Social Policy) and managed to find my way into a basic understanding of the neoclassical model as well as a critique of it from a gender perspective. This was all done in 10 weeks, with a lot of reading of course. I suggest adding this to your list, as at its heart, the neoclassical model fails to theorise the experience or contribution of humans positioned as women in and to the economy.
You could point people to this as an introductory text http://www.amazon.co.uk/Beyond-Economic-Man-Economics-ebook/dp/B004G09YIO/ref=sr_1_fkmr0_2?ie=UTF8&qid=1365319360&sr=8-2-fkmr0&keywords=folbre+nelson+beyond+economic
and to this for more recent articles. http://www.feministeconomics.org/
This is a well theorised and established brach of heterodox economics although many men will be put off at the word feminist. Such is the challenge of integrating womens perspectives into economics.