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Fixing Economics - It's Not Rocket Science

David Chappell

published 16 December 2016

Dave Chappell is a John Locke Alumnus currently studying at Yale-NUS College in Singapore. He is editor-in-chief of the main student-run publication, The Octant, and is currently studying Politics, Philosophy and Economics.

Fixing Economics - It's Not Rocket Science

On a standard afternoon of macroeconomics my professor was explaining the neoclassical consumption model. She explained that households would smooth their consumption over the course of their lives. This seemed reasonable to me. What followed, however, did not. She said that this was because households base their consumption on their lifetime income.

 

I had heard many improbable assumptions during my time studying economics but this just seemed too unrealistic. I asked “how do you know how much money you’re going to earn next year, let alone during your lifetime? What if you get fired?” My professor paused for a moment and then shot back, “wouldn’t you like that?”

 

While a great comeback, this answer typifies the problems with how universities teach economics. Students spend too much of their time learning and solving unrealistic models inside an economics bubble that is completely separate from reality. This attitude undermines the integrity of economics and has worrying implications for policy makers. We need to address it now!

 

Thomas Carlyle, a historian, called economics the dismal science. While many dispute why he did so, the term has stuck because it describes what many think about the subject. It prides itself on being scientific but without the method to back it up. 

 

This is troubling. If true, then world leaders are listening to theories that aren't supported by evidence. If not, then many are ignoring important ideas when making decisions. The reality is a likely a mix of the two and can have grave consequences for those that suffer the results of those poor decisions.

 

However, the current wave of anti-establishment sentiment makes the situation even worse. This mistrust of economists has caused many to ignore their advice throughout the year, voting for things like Brexit and Donald Trump. Indeed, some viewed the economic consensus around the harms of Brexit as a reason for suspicion. Whether people are right to reject the advice of experts, the situation is dire. Either our experts are wrong or people refuse to listen to them.

 

Regardless of which is correct, economic education plays a large role in fixing it. If universities can dispel the dismal science label then confidence will slowly return. By fostering a greater diversity of opinion and focus on the scientific method decision making will improve. As decisions improve, so too will people's confidence.

 

To do this, economics courses need to focus more on empirical evidence. There are many cases where theories over-estimate or under-estimate certain effects. While this problem is not unique to economics, other courses address it with a heavy focus on empirical studies. Sadly, this is not the case for core economics courses, such as micro and macro economics. Instead, core courses cover key theories and models without touching on their limitations. This is a shame because economic research is on par with other disciplines in rigour and robustness. 

 

This is easily addressed. Universities need to dedicate some course time to cross-checking the concepts they introduce. Many empirical studies for core economic concepts exist, so professors and textbooks should mention them. Professors can also use economic history to provide case studies when papers aren't available. My class on Public Economics did this well, for the behavioural response to taxes. The study of empirical evidence showed us that it primarily affected whether people chose to enter the labour force. The evidence also showed that it had a much smaller effect at the margin and is non-existent in the case of Kibbutz socialist communities. These insights have a large impact on how I now view redistributive policies. Still, they were not present in any core economics courses. Including these insights needn't take much time and can replace unnecessary mathematical calculations. This brings me on to my next point.

 

Universities need to reduce the focus on mathematics in economics. While it is true that mathematics can be useful to for understanding economic concepts, often it is unnecessary. Students perform needlessly complicated calculations with models that bear little resemblance to reality. This puts off economics students that aren't good at mathematics and gives those that are a false confidence in their predictive powers. Using the neoclassical consumption model tells us nothing if the assumptions this model makes are unrealistic.

 

Instead, professors should use calculations to give students a deeper understanding of the theory. By performing calculations with a model, students can reveal its assumptions and implications. This teaches them about both its strengths and limitations. My Public Economics class used calculations to show the importance of the behavioural response to income tax. Based on standard models, utilitarian governments would tax and redistribute 100% of everyone’s earnings. Classes should focus on these instances instead of performing calculations with fictitious data.

 

Finally, there needs to be more critical discussion of economic concepts. Currently, economics is an insular experience: students spend their entire time in the classroom learning about theories without seeing them applied in the real world; professors teach students economic concepts but don't give them space to discuss their validity; and the study of economics rarely makes mention of other disciplines. As a result, economics lacks diversity of thought. People even make jokes about economics departments and safe spaces.

Economic courses can fix this by providing a space for critical thought. In my introductory psychology course, we would always discuss the concepts. There is no reason economics classes cannot do the same. Core courses should also incorporate other disciplines. This should start with behavioural economics. Students shouldn't have to take a separate course to learn about the limitations of economic theories. Instead, this should take place when core courses introduce the concepts. Finally, bringing in guest speakers or taking field trips can give these courses real world grounding. Again, this would not be hard to put in place. Microeconomics classes can visit businesses and macroeconomic classes can visit government departments.

 

The best example of this I have experienced was my time at the John Locke Institute. During the summer school in France, we spent an equal amount of time discussing concepts as we did learning them. In my gap year course, we covered all the mathematical concepts from the first term of Oxford but also questioned their validity. I hope that if budding economists take courses like these then the discipline can start to improve.

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