October 09, 2014

Economics books are quite the opposite of what the FT thinks they teach

Writing about web page http://www.ft.com/cms/s/0/60feaa0c-47d0-11e4-ac9f-00144feab7de.html

On 25 September the Financial Times published an editorial "Economics needs to reflect a post-crisis world":

The typical economics course starts with the study of how rational agents interact in frictionless markets, producing an outcome that is best for everyone. Only later does it cover those wrinkles and perversities that characterise real economic behaviour, such as anti-competitive practices or unstable financial markets. As students advance, there is a growing bias towards mathematical elegance. When the uglier real world intrudes, it only prompts the question: this is all very well in practice but how does it work in theory?

... Fortunately, the steps needed to bring economics teaching into the real world do not require the invention of anything new or exotic. The curriculum should embrace economic history and pay more attention to unorthodox thinkers such as Joseph Schumpeter, Friedrich Hayek and – yes – even Karl Marx. Faculties need to restore links with other fields such as psychology and anthropology, whose insights can explain phenomena that economics cannot. Economics professors should make the study of imperfect competition – and of how people act in conditions of uncertainty – the starting point of courses, not an afterthought.

My response was published on 1 October under the heading "Economics books are quite the opposite of what the FT thinks it teaches" (what the FT thinks they teach, surely):


You write (editorial, September 26) that economics courses too often begin with “how rational agents interact in frictionless markets”, and only later proceed to “anti-competitive practices or unstable financial markets”. This is not so: the problem is quite the opposite. All introductory textbooks quickly cover imperfect markets and the government interventions required to correct them. Thus, the belief that free markets are always for the best is quickly punctured. Replacing it you will too often find the idea of the government regulator as a Victorian civil servant: high-minded, well educated and perfectly equipped to make decisions for society. At the same time, the wealth of research on power-building, corruption, and incompetence in high places around the world is treated as an “advanced” special subject that only a few will ever follow.

Mark Harrison, Professor, Dept of Economics, University of Warwick, UK

- 3 comments by 2 or more people Not publicly viewable

  1. Liviu Damsa

    But when did any of these journalists read last time (if they every read one, after all) an economics book on the subject they allegedly cover?

    09 Oct 2014, 13:29

  2. Unlearningecon

    I’d say economics education has a U-shaped relationship with market ‘imperfections’: the basic textbooks cover everything in passing, then once the more detailed micro theory starts you have to assume away imperfections to make the theories doable for students, then in advanced UG or PG classes you begin to add the frictions again but in far more depth.

    21 Oct 2014, 21:57

  3. Mark Harrison

    The reality may be more complicated. If there is a U-shape as you suggest, it should be visible in the second undergraduate year, so I looked at some of our recent second-year macro and micro principles exam papers. In the micro principles papers some questions are as you predict; they require the student to show familiarity with a neoclassical micro-model and solve it. But many, maybe most questions deal with internal or external departures from this model. By internal departures I mean cognitive limitations on “perfect” rationality such as loss aversion and present bias. By external departures I mean contexts involving strategic interaction, which immediately violate the assumptions that markets are impersonal and have a unique equilibrium. If you look at macro principles, much of the syllabus is about what stops the labour market from clearing, liquidity traps, currency crises, arguments for and against deposit insurance, and so on. Of course there is an effort to keep the models tractable, but I don’t suppose anyone would advocate the converse. And this is just principles. Many students spend much of their time doing applied subjects (including my own, economic history) where beliefs, institutions, and policy interventions are continually invoked.

    My point is not that the syllabus is perfect or should not change. It is that it does not train our students as market fundamentalists.

    22 Oct 2014, 09:30

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I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).

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