Fight for Our Principles!

Principles of Macroeconomics, that is, since it is under attack from Noah Smith, who argues for eliminating introductory macroeconomics classes.  In a blog post, he writes:

Why should undergrads learn macro in their first year of econ? If they go on to be econ majors they can easily start out with intermediate macro and not miss anything important. If they just take the first-year econ sequence and then go into the business world, what do they really need to know?

I think this badly misunderstands what we're trying to accomplish in a introductory level course - principles of macroeconomics is not about preparing students for business careers (though business students certainly should take it - as should everyone else).  The two main benefits of taking an introductory macroeconomics course are:

First, it prepares students to be more knowledgeable and effective citizens.  Among other things, students come away from the class able to interpret data like unemployment, inflation and GDP that they read about in the news.  They learn some basic facts about taxation and government spending that can help them evaluate claims made by politicians.  The Federal Reserve is pretty mysterious to most people - students learn what it does and how monetary policy works and the basics of how a banking/financial crisis can occur.  This seems particularly valuable in a time when the Fed is facing political criticism which is at least partly based on its widely misunderstood response to a financial crisis.

Second, working with economic models develops thinking and mathematical skills.  Smith makes the point that the models we teach in an intro class have their flaws (as do the models we teach in PhD-level classes...), though I still think they're quite useful for thinking about a number of issues.  But the act of manipulating a model and working out how assumptions are linked to conclusions helps students become sharper thinkers, and this stays with them long after they've forgotten the specifics of any particular model.

At my current station, I'm teaching a one-semester introductory course that covers both micro and macro topics, but I had a full-semester macro principles course at my previous stop - an outline of what I did is posted here.  The time students have in college is a very scarce resource, and the opportunity cost of any college class is very high, but I think principles of macroeconomics is almost always a good choice.  Though perhaps I'm a little biased...

Economics is More Than You Think

and it helps you learn how to think....

One of the challenges in teaching economics is that many come to it with incorrect expectations - people seem to view it as akin to accounting or finance.  In a liberal arts setting, the students (and their parents) may believe it is the closest thing they can get to a business major (this paper provides evidence on this point).
This short video from the American Economic Association - "A Career in Economics - It's Much More Than You Think" - does a nice job of correcting some of these misconceptions.

However, I think the video misses one of the main reasons for studying economics: the habits of mind - "critical thinking skills" - it helps students develop (I wrote more about this here).  Most of our students aren't going on to careers in economics, and they will forget many of the specifics, but being able to think coherently about tradeoffs and the linkages between assumptions and conclusions is a lifelong benefit.

So, yes, people who are interested in business should study economics, as should people who are interested in a career in economics (my own advice about that is here), but so should everyone else!

Economics Needs More Women

that's the headline on this Wesleying post by econ major Kerry Nix '16 (and in the post there is a link to a longer report that is well worth reading).

First of all: yes.

Overall, as the report notes, about 25-30-ish percent of Economics students at Wesleyan are female; this is pretty consistent with national averages.  So, its not just us, but that doesn't mean that we can't do some things locally.

My colleagues are an extraordinarily conscientious group of people and I have no doubt that this will get careful consideration.  In the meantime, however, here are a few scattered thoughts on some of the issues raised:

There is quite a bit of concern about whether the atmosphere in classrooms with a relatively large number of students and a lopsided gender ratio is particularly off-putting to women.  I think this is plausible, though this is one of several concerns where it might be helpful to have some survey research to back up (or not!) our anecdotal impressions. 

Many of our classes rely primarily on lecture-based pedagogy; there are some suggestions in the report that other approaches - e.g., in-class problem-solving or inverted classrooms - might be more appealing to female students.

In this regard, at present, I think the situation at Wesleyan is that we're very constrained by class size: our enrollments (and majors) per FTE are among the highest in the university.  While the size of the department has increased slightly, it hasn't remotely kept up with the growth in enrollments.  What that means is that our sections of Econ 110 (our intro class for majors) typically have 40-50 students; sections of the lower-level electives and the core intermediate sequence for majors have enrollment caps of 35 (and are very often at or near this cap); it is only the upper-level electives that could be considered "small," and even these have 25 students per class.  While these numbers don't seem high in the universe of American higher education overall, this is in the context of an institution where 72% of class sections have an enrollment of 19 or fewer and where many of the incoming students have chosen a liberal arts college with the expectation of small classes.

In a large class, it will be inherently less comfortable for most to participate and ask questions and the report suggests this might disproportionately affect female students (though I think it's a concern for everyone).  As instructors, it also limits our pedagogy, and the preponderance of lecturing in economics is partly a reflection of our class sizes.  I have been able to integrate some in-class problem solving in Econ 270 (a lower-level international economics elective) and Econ 110.  In Econ 302 (the core macroeconomics course), I experimented with an inverted classroom in the fall; I think it went quite well, but I happened to have a section with a smaller enrollment - I doubt it will be as successful when (if) I have a more typical enrollment of 35.

Another issue raised is the mathematical intensity of our curriculum and how this might interact with lower levels of mathematical confidence in female students.  As a factual matter, I don't think a confidence differential is warranted; there's no lack of math ability in the women coming into our classes - this is true both relative to men and in an absolute sense.  However, I suppose stereotypes that mathematical stuff is "hard" and "softer" topics are better suited to women are deeply embedded in the broader culture - hopefully fading over time, but not quickly enough.  Overall, I believe the mathematical rigor of our program is a strong suit - Wesleyan is very unusual in utilizing calculus from the outset (Econ 110).  One of the most valuable things that students take away from studying economics is the habits of mind - i.e., a particular type of critical thinking - that come from the discipline imposed by thinking in terms of models, expressed and manipulated in mathematical language.  Moreover, economics as it is practiced is a very mathematical discipline - while some may not like this (and I was a very math-averse economics undergraduate myself at one point) - I think our introductory class more honestly represents what studying economics involves than the more typical style of university "principles" courses which try to minimize using math.

Relatedly, the report discusses concerns about relevance -

Caroline finds disconnectedness between Econ and the real world, saying “it does seem like just learning how to crunch numbers right now, but I think learning...what sort of policy differences you could make if you learned about Econ, and I think that would encourage more people to take Econ.”

I'm not sure this is gender-specific; as an instructor, I need to guide my students through the theory - this is, for most, the hardest part, and where they most need the help of a professor (one of the reasons I majored in economics was that I perceived I needed this as a student).  We're time-constrained in class, but I've tried to use reading assignments to enhance students' sense of how the theory applies.  Over the course of the curriculum, the students learn about how we test theory against data and develop an understanding of how we choose which models (and therefore what simplifications) are appropriate under alternative circumstances.  But this all rests on groundwork we build in the introductory class and I think it is worth thinking about whether there might be changes we could make in its structure that could address some of these concerns.

The report also mentions grades, citing Claudia Goldin's research that women are more likely then men to be put off further study by low grades in introductory classes (summarized in this Washington Post column by Catherine Rampell, which I discussed in an recent post).  Economics does have one of the lowest grade point averages at Wesleyan - our grades are inflated, but less so than those in most other departments.  I think this is a serious issue - this effort at Wellesley to impose common grading standards demonstrated how much grading differentials across departments distort students' choices.  To the extent that women's choices are more affected then men's, grade inflation is a gender equity issue.  However, I think the culprit is not the economics department, but others where the grade inflation has gotten out of control (which I think is an unsurprising symptom of the reliance on student evaluations in promotion and tenure).

Another issue raised by the report is whether men are more likely to be attracted to economics because they believe it suits their vocational goals.  The misperception that an economics major is a proxy for studying business or finance runs deep.  I should write more about this sometime; for now, I'll simply say that this reflects a fundamentally incorrect view of what economics is about.  To the extent that this is disproportionately bringing more male students into economics, they're coming for the wrong reasons and the implication would be that "economics needs fewer men."

There's quite a bit more in the report that is worth thinking about.  Some of the issues are fundamentally about student culture - Wesleyan students seem to mostly be pretty good at maintaining their culture and supporting each other, so I am optimistic that the students can make progress, as well as the faculty.

STEM versus Liberal Education?

In a Washington Post column headlined "Why America's Obsession with STEM Education is Dangerous," Fareed Zakaria writes:

This dismissal of broad-based learning, however, comes from a fundamental misreading of the facts — and puts America on a dangerously narrow path for the future. The United States has led the world in economic dynamism, innovation and entrepreneurship thanks to exactly the kind of teaching we are now told to defenestrate. A broad general education helps foster critical thinking and creativity. Exposure to a variety of fields produces synergy and cross fertilization. Yes, science and technology are crucial components of this education, but so are English and philosophy. When unveiling a new edition of the iPad, Steve Jobs explained that “it’s in Apple’s DNA that technology alone is not enough — that it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our hearts sing.” 

There is much to agree with in the case he makes for liberal education, but the way he (and the Post's headline writers) frame it is problematic.  We don't face a tension between science, engineering and mathematics and liberal education; science and mathematics are part of liberal education, and engineering should be too.

Zakaria is right that liberal education is concerned with "critical thinking and creativity."  To be effectual, these require a set of intellectual tools to understand the world around us.  Liberal education as it is practiced does fairly well through the humanities and social sciences of expanding students' capacities to think about the human and social world.  But the social world is shaped by the physical and biological, the mechanical and computational.  And here I worry we aren't doing such a good job - we seem too ready to declare that we're not "math people" (and, it mostly follows from this, not science or engineering people).  Doing so early in a child's academic life means that they will later find many areas closed off to them.  At the college level, we accommodate this with science for non-scientist courses - every college has its "physics for poets" and "rocks for jocks."   Some of them are likely fantastic classes, but there is a worrying asymmetry - we don't seem to feel a need to offer "poetry for physicists" or "social theory for biologists".  To some extent, this reflects what we're given - too many of our incoming students have already "tracked" away from serious studies in math and science (or turned off to them).  But it raises a question of the seriousness of our commitment to science and math as a real part of liberal education.

The importance of science and math in liberal education is not just in knowing "stuff," or "how stuff works" - though I think knowing stuff, and how it works, is often underrated - but in learning other modes of thought which can extend our mental capacities and give us another perspective.

While Zakaria picked up on our current STEM-mania (much of which is misguided, even on its own terms), and his column's headline puts science and liberal arts in a false opposition, his real target - a narrow vocationalism - is a valid one.  Economic insecurity and the wage premium for college graduates have helped entrench the belief that a college degree is some sort of golden ticket. This is a far too circumscribed view: a good education should enhance one's working life (regardless of how remunerative) - but it should also enrich our lives as citizens and people.  That is, it should help us, as Keynes put it, to "live wisely, agreeably and well."  We would be better able to do this if we took science and math education a little more seriously.

Update (3/31): At Forbes.com, Union College's Chad Orzel has a nice response - "science is essentially human" - to Zakaria's piece.

Economics, Grade Inflation, and Gender

The NSF updates us on the share of economics degrees earned by women:

while the share of female PhD is now up to about one-third, the fraction of undergraduate economics majors has slipped back under 30%.

In a Washington Post column last year, Catherine Rampell argued that the obsession with grades can partially account for the relatively low percentage of women majoring in economics as well as in science, engineering and math fields.  The women don't do worse then the men, but apparently they're more likely to avoid areas where grades are, generally, lower.  She writes:

Claudia Goldin, an economics professor at Harvard, has been examining why so few women major in her field. The majority of new college grads are female, yet women receive only 29 percent of bachelor’s degrees in economics each year.

Goldin looked at how grades awarded in an introductory economics class affected the chance that a student would ultimately major in the subject. She found that the likelihood a woman would major in economics dropped steadily as her grade fell: Women who received a B in Econ 101, for example, were about half as likely as women who received A’s to stick with the discipline. The same discouragement gradient didn’t exist for men. Of Econ 101 students, men who received A’s were about equally as likely as men who received B’s to concentrate in the dismal science. 

One of my ongoing, and largely futile, battles as a college professor is to convince my students that their grades don't matter - or at least, they don't matter nearly as much as the students often think they do.  Alas, obsession with grades is pretty deeply entrenched in young people who've been coached for years to compete to get into college.  This may have gotten worse over time with perceived increases in the competitiveness of admissions (the perception isn't fully accurate: declining acceptance rates are partly due to colleges soliciting more applications to make their numbers look better, as well as the growing ease of applying to large numbers of colleges), as well as increasing anxiety about financial outcomes after college.

Not only does the obsession with grades distract us from the real purpose of learning, the apparent difference between how men and women respond to them contributes a gender gap in fields like economics, which appear less prone to grade inflation (this study from Wellesley provides further evidence on how grade inflation distorts students' choices, though it doesn't consider gender differences).  One could make the case that grade inflation is thus an equity issue.

The better news from the NSF's report is the continued increase in the share of women earning PhDs (though the discipline still faces "leaky pipeline" issues).  I'm not too worried that the decrease in the share of women earning US undergraduate economics degrees will impact graduate education, since US graduate programs draw from a global pool (only about 30% of US PhDs go to Americans).  However, I don't think we should be hopeful that a greater share of female professors will bring more women into undergraduate economics: while a "role model" effect sounds plausible, the empirical evidence does not seem to support it.

Reminder: Your Major is Not Your Career

On twitter, Diana Farrell (Wes '87) points us to a fantastic interactive graphic from Williams math Professor Satyan Davadoss.

What college majors end up in what professions? See this great graphic!. More parents and students need to know. http://t.co/Pi2QpwznE3
— Diana Farrell (@Farrell_Diana) January 21, 2015

The varied paths from all the different majors is an excellent corrective to the widespread misperception that one's major determines one's career.

Economics Navel-Gazing, Curricular Edition

A group of economics students in the UK have undertaken a movement to reform the economics curriculum.  I'm a little surprised that I haven't run into similar sentiments at Wesleyan - I can't decide if I'm disappointed or relieved by this.

The criticisms seem to me to be based on a somewhat unfair caricature of economics and economists, that we're head-in-the-sand apologists for "neoliberalism" who use mathematics as a form of obscurantism and have little useful to say about the "real world," particularly in the wake of the financial crisis.

Some of this may be rooted in the fact that the "economics" articulated by politicians, government officials and the press - what Simon Wren-Lewis has called "mediamacro" - does not reflect the views of most of mainstream academic economics.  In particular the obsession with government budget deficits is not based on textbook economics (I discussed an example of this misconception in a European context a couple of years ago).

Markets are at the heart of economics - this may be where the view that economists are "free market fundamentalists" comes from.  In introducing markets, though, there are really two main points to make:

1. The gains from exchange and specialization possible from voluntary trade (i.e., Adam Smith's "Invisible Hand"), and the ability of markets make to adjustments based to dispersed information about what Hayek called "the particular circumstances of time and place" which would be un-knowable to any central planner.
2. While economists need to make our students aware of the hidden and under-appreciated role markets play in organizing society and in lifting humanity out of subsistence-level poverty, we also devote a considerable amount of attention to how they fail.  In particular, problems of monopoly power, externalities, public goods and asymmetric information are standard subjects for introductory economics courses.  (2a., There are also reasons to be skeptical in practice of the ability of our political system to effectively correct market failures).

We do suffer from an excess of libertarians who mistakenly believe that economic theory validates their views - I usually think of these people as students who stopped listening after they learned about point #1 in first several weeks of their principles courses (or put too much weight on #2a).  But these folks are a minority in economics, though perhaps a vocal enough one that students and other outsiders might believe they are more representative than they really are.

We typically introduce markets with the model of "supply and demand," and the exercise of thinking in terms of models provides much of the lasting value of studying economics.  Working with economic models can sharpen students' logical and critical thinking skills immensely.  As John Cochrane nicely put it recently, "economic models are quantitative parables, not explicit and complete descriptions of reality." The criticism that models are "simplifications" is a cheap one - writing down a set of assumptions in mathematical form and working out the implications (and then testing them against data), is where the insight comes from.  The discipline of doing this cultivates an ability to think intelligently about tradeoffs and hidden costs, and to trace conclusions back to underlying assumptions and consider how changing assumptions lead to different conclusions.  Since models are, by necessity, very stylized descriptions of the world, students of economics must not only learn how to work with them, but also how to judge which simplifications are appropriate for a given circumstance or question.  As Keynes said, "Economics is the science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world."

So I think the core of what we try to do in our introductory economics courses - introducing markets (both their successes and failures), and teaching students how to think in terms of models - is extremely worthwhile.  Of course, this does not cover everything that we possibly would like to do in a course (or in small set of courses).  Much of economics is concerned with the allocation of scarce resources, and the time that our students can spend on a course in a semester (both in and out of the classroom) is very limited, forcing some difficult choices on instructors.  Some of the criticisms made by the UK students seem to be about what we're leaving out, though I think what we're doing in our introductory courses is pretty important, and laying some groundwork in the economic way of thinking will help the students tackle issues like understanding the financial crisis, either in later classes or independently.  While many of the debates in the news are about macroeconomic policy (and as a macroeconomist, I'm happy to see the revival of interest in the topic, even if arises from unfortunate sources), the core microeconomic concepts are very important and not to be skipped.  While it can be exciting to be teaching a subject that is relevant to contemporary events, we should not be seduced into bringing "news" into the classroom in a way that interferes with developing an understanding of the fundamentals.

There is sometimes a bit of a muddle in these navel-gazing discussions, too, between what should be in our undergraduate curriculum and the separate, but not wholly unrelated, issue of our research agenda and graduate curriculum.  I'm not entirely unsympathetic to the calls for "methodological pluralism" though I wouldn't go as far as the UK students would like.  I have argued for graduate study of the history of economic thought, and I have emphasized it in my undergraduate teaching, using it as an organizing principle for my intermediate macroeconomics class (and also making my intro students read some Smith, Hayek, Friedman and Keynes).  As a field, I do think macroeconomics is at a point where we should be open to reconsiderations of some of the standard tools (though I don't think that is ever not the case), and I worry that the "publish or perish" incentives we all face mean that we do too little of that.

Karl Whelan of University College, Dublin has a written nice essay "Teaching Economics 'After the Crash'" with a more detailed response to the UK students' criticisms which is well worth reading.

Classroom Technology

Despite evidence that having computers in class is not good for students, Slate's Rebecca Schumann argues that professors should permit them anyway:

[P]olicing the (otherwise nondisruptive) behavior of students further infantilizes these 18-to-22-year-olds. Already these students are hand-held through so many steps in the academic process: I check homework; I give quizzes about the syllabus to make sure they’ve actually read it; I walk them, baby-steps style, through every miniscule stage of their essays. Some of these practices do indeed improve what contemporary pedagogy parlance calls “learning outcomes” (barf) because they show students how invested I am in their progress. But these practices also serve as giant, scholastic water wings for people who should really be swimming by now.

My colleagues and I joke sometimes that we teach “13^th-graders,” but really, if I confiscate laptops at the door, am I not creating a 13^th-grade classroom? Despite their bottle-rocket butt pranks and their 10-foot beer bongs, college students are old enough to vote and go to war. They should be old enough to decide for themselves whether they want to pay attention in class—and to face the consequences if they do not.

I'm sympathetic to the argument - I've never had an "attendance policy" for essentially the same reason - but what Schumann misses is that the use of laptops have a negative spillover effect (what economists call an "externality").  A student who is using a computer will not only distract herself but also the students around her - it is the harm to others, and the classroom environment more generally, that justifies prohibiting computers in class.

Schumann goes on to argue the real problem is lecture format classes.  I don't think its appropriate to generalize - the optimal format probably varies across subjects (and across students, too, which may be a more difficult problem).  I'm planning some pretty big changes to the way I teach my classes for the coming year that will significantly reduce the amount of lecturing I do.  I wouldn't be doing this if I didn't expect the benefits to outweigh the costs, but I suspect the virtues of the traditional lecture style may be under-appreciated these days.  In particular, the act of note-taking by hand is a valuable part of the learning process.  A recent NY Times story about the decline of handwriting instruction in schools discussed some evidence on that point:

Two psychologists, Pam A. Mueller of Princeton and Daniel M. Oppenheimer of the University of California, Los Angeles, have reported that in both laboratory settings and real-world classrooms, students learn better when they take notes by hand than when they type on a keyboard. Contrary to earlier studies attributing the difference to the distracting effects of computers, the new research suggests that writing by hand allows the student to process a lecture’s contents and reframe it — a process of reflection and manipulation that can lead to better understanding and memory encoding.

Although we should always be looking for ways to improve, and to take advantage of new technology where it can be helpful, sometimes "innovation" carries hidden costs, and we will make better choices if we try to understand what those might be and take them into account.

Accounting and the Liberal Arts

I've had mixed feelings about offering accounting classes in a liberal arts college economics department.  Liberal arts colleges don't typically offer accounting majors or have accounting departments, but an accounting course or two might be on the books in the economics department.

The reason for my reservations about it is that I worry that it reinforces a mis-perception that studying economics is more "vocational" or "practical" than other parts of the liberal arts curriculum - i.e., that an economics major is somehow a proxy for getting a business degree.

However, there is a good case for liberal arts students learning about accounting - financial statements are an important source of information in our society, so being able to interpret them is valuable for anyone who might want to (critically) examine the activities of businesses or the government.

This NY Times opinionator piece by Jacob Soll nicely argues for the value of accounting for an informed citizenry:

The German economic thinker Max Weber believed that for capitalism to work, average people needed to know how to do double-entry bookkeeping. This is not simply because this type of accounting makes it possible to calculate profit and capital by balancing debits and credits in parallel columns; it is also because good books are “balanced” in a moral sense. They are the very source of accountability, a word that in fact derives its origin from the word “accounting.”

Bernanke Isn't Neutral on the Long-Run

When I first started teaching intermediate macroeconomics ten years ago, I decided to consider economic growth in the first part of the class.  Partly my reasoning was tactical - its the most mathematically challenging part of the class for many students, so I thought it was good to get them in the habit of working hard and taking it seriously at the start (and the competing claims on students' time tend to be less severe earlier in the semester).  The more important rationale was motivation - at the time we were in the midst of the "great moderation" and it was hard to get students who had never seen a serious recession in their lives excited about learning about things like how the Fed sets interest rates.  That, of course, has changed, and I think starting in with business cycles would be a good way to get the students "hooked" now - its tempting to change, but I've stuck with my strategy of emphasizing growth at the beginning of the semester.

As I noted in a recent post, long-run economic growth is the most important determinant of how living standards change from generation to generation, and why they vary so much from country to country.  The rise in incomes over decades is much bigger than the disruptions due to any business cycle downturn, even relatively large ones like the slump following the 2007-08 financial crisis.  Economic theory says that the main determinant of growth in the long run is technological progress, though we're still a little iffy on explaining how that technological change occurs.

Robert Lucas famously said: "Once you start thinking about economic growth, its hard to think about anything else."  Actually, that's pretty wrong - its very easy to be focused on short-run fluctuations and policy responses to them (and this is really important, and the negative consequences of recessions are understated by representative agent type models that Lucas tends to favor).

Ben Bernanke used his commencement address at Bard College at Simon's Rock as an opportunity to step back from his usual focus on managing short-run fluctuations and talk about economic growth.   His speech acts as a rebuttal of sorts to Robert Gordon and others who are worrying that the benefits of the information technology "revolution" for productivity growth are already petering out.  The core of his response is:

First, innovation, almost by definition, involves ideas that no one has yet had, which means that forecasts of future technological change can be, and often are, wildly wrong. A safe prediction, I think, is that human innovation and creativity will continue; it is part of our very nature. Another prediction, just as safe, is that people will nevertheless continue to forecast the end of innovation. The famous British economist John Maynard Keynes observed as much in the midst of the Great Depression more than 80 years ago. He wrote then, "We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the 19th century is over; that the rapid improvement in the standard of life is now going to slow down." Sound familiar? By the way, Keynes argued at that time that such a view was shortsighted and, in characterizing what he called "the economic possibilities for our grandchildren," he predicted that income per person, adjusted for inflation, could rise as much as four to eight times by 2030. His guess looks pretty good; income per person in the United States today is roughly six times what it was in 1930.

Second, not only are scientific and technical innovation themselves inherently hard to predict, so are the long-run practical consequences of innovation for our economy and our daily lives. Indeed, some would say that we are still in the early days of the IT revolution; after all, computing speeds and memory have increased many times over in the 30-plus years since the first personal computers came on the market, and fields like biotechnology are also advancing rapidly. Moreover, even as the basic technologies improve, the commercial applications of these technologies have arguably thus far only scratched the surface. Consider, for example, the potential for IT and biotechnology to improve health care, one of the largest and most important sectors of our economy. A strong case can be made that the modernization of health-care IT systems would lead to better-coordinated, more effective, and less costly patient care than we have today, including greater responsiveness of medical practice to the latest research findings.  Robots, lasers, and other advanced technologies are improving surgical outcomes, and artificial intelligence systems are being used to improve diagnoses and chart courses of treatment. Perhaps even more revolutionary is the trend toward so-called personalized medicine, which would tailor medical treatments for each patient based on information drawn from that individual's genetic code. Taken together, such advances could lead to another jump in life expectancy and improved health at older ages.

Other promising areas for the application of new technologies include the development of cleaner energy--for example, the harnessing of wind, wave, and solar power and the development of electric and hybrid vehicles--as well as potential further advances in communications and robotics. I'm sure that I can't imagine all of the possibilities, but historians of science have commented on our collective tendency to overestimate the short-term effects of new technologies while underestimating their longer-term potential.

Finally, pessimists may be paying too little attention to the strength of the underlying economic and social forces that generate innovation in the modern world. Invention was once the province of the isolated scientist or tinkerer. The transmission of new ideas and the adaptation of the best new insights to commercial uses were slow and erratic. But all of that is changing radically. We live on a planet that is becoming richer and more populous, and in which not only the most advanced economies but also large emerging market nations like China and India increasingly see their economic futures as tied to technological innovation. In that context, the number of trained scientists and engineers is increasing rapidly, as are the resources for research being provided by universities, governments, and the private sector. Moreover, because of the Internet and other advances in communications, collaboration and the exchange of ideas take place at high speed and with little regard for geographic distance. For example, research papers are now disseminated and critiqued almost instantaneously rather than after publication in a journal several years after they are written. And, importantly, as trade and globalization increase the size of the potential market for new products, the possible economic rewards for being first with an innovative product or process are growing rapidly.  In short, both humanity's capacity to innovate and the incentives to innovate are greater today than at any other time in history. 

In typical Bernanke fashion, the whole speech is very nicely done (he must be a fantastic professor).  Another thing I liked about it is that Bernanke also makes a case for liberal arts education:

Well, what does all this have to do with creativity and critical thinking, which is where I started? The history of technological innovation and economic development teaches us that change is the only constant. During your working lives, you will have to reinvent yourselves many times. Success and satisfaction will not come from mastering a fixed body of knowledge but from constant adaptation and creativity in a rapidly changing world. Engaging with and applying new technologies will be a crucial part of that adaptation. Your work here at Simon's Rock, and the intellectual skills, creativity, and imagination that that work has fostered, are the best possible preparation for these challenges. And while I have emphasized technological and scientific advances today, it is important to remember that the arts and humanities facilitate new and creative thinking as well, while helping us to draw meaning that goes beyond the purely material aspects of our lives. 

I'd been thinking of adding Robert Gordon's paper on the "headwinds" facing economic growth to the reading list for next year.  Bernanke's speech will be a nice counterpoint to go with it.

The speech is also discussed by the NYT's Binyamin Appelbaum and Washington Post's Neil Irwin.

The Structure of Macroeconomic Revolutions?

Macroeconomics sometimes appears to be a somewhat confusing swirl of models and "schools of thought." This can be a somewhat off-putting feature to students (though for some of us it is also part of what makes macroeconomics more interesting than microeconomics).  When I introduce it to my students, I make a nod to Thomas Kuhn's "Structure of Scientific Revolutions" framework, which provides a way of putting some structure on the development of macroeconomics that is more sophisticated than framing it as a series of "debates" between "sides" (i.e., "classical" vs. "Keynesian", "saltwater" vs. "freshwater", etc.).

So I liked this post by Matthew Yglesias, where he invokes Kuhn and draws an analogy between macroeconomics and the Copernican revolution in astronomy.  He recounts how Copernican (Earth revolves around the sun) astronomy eventually supplanted Ptolemaic (Earth is center of universe), but initially the Ptolemaic system made much better predictions, and concludes:

My view, with both all due respect and all due derision, is that the Robert Lucas types are like the early Copernicans here. There’s something admirable in their insistence that it ought to all work out to an easily modeled system grounded in compelling theoretically considerations. The New Keynesian model is a mess, like late-Ptolemaic astronomy, thrown together to account for observed reality. But you don’t fly to a moon with an elegant model that delivers mistaken predictions about where the moon’s going to be. And what we actually need is a Kepler to give us an elegant model that actually predicts the phenomena, and then a Newton who can explain what that model means. 

Hmmm... I'm more inclined to place the users of old Keynesian models, including the IS-LM-based macroeconometric models used by policymakers, in the "late-Ptolemaic" role, but, in any case, the Kuhninan approach helps explain why I simultaneously agree with Brad DeLong, Paul Krugman and Greg Mankiw that the IS-LM model remains a very useful tool, while being a little more optimistic than Krugman about the state of macroeconomics.

Also, I'm not sure that Lucas and others (including new Nobel laureate Tom Sargent) who have pushed macroeconomics towards "structural" or "micro-founded" models are leading us to an "easily modeled system." What counts for "elegance" in modern macro is consistency between the macroeconomic model and micro-economically optimal behavior on the part of consumers and firms (I suppose the obvious retort to that is to invoke Emerson: "A foolish consistency is the hobgoblin of little minds").

The Graduate Curriculum

Macro navel-gazing turns (again) to the graduate curriculum....

Brad DeLong:

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

Yet that is not what economics departments are saying nowadays.

Perhaps I am missing what is really going on. Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s. But if I am missing some big change that is taking place, I would like somebody to show it to me.

As if it weren't bad enough that some assistant professors are writing blogs, a Michigan grad student named Noah Smith is blogging, too.  After a description of his first-semester macro class, he says:

This course would probably have given Brad DeLong the following reasons for complaint:

1. It contained very little economic history. Everything was math, mostly DSGE math.
2. It was heavily weighted toward theories driven by supply shocks; demand-based theories were given extremely short shrift.
3. The theories we learned had almost no frictions whatsoever (the two frictions we learned, labor search and menu costs, were not presented as part of a full model of the business cycle). Other than Q-theory, there was nothing whatsoever about finance* (Though we did have one midterm problem, based on the professor's own research, involving an asset price shock! That one really stuck with me.).

At the time I took the course, I didn't yet know enough to have any of these objections... 

Paul Krugman:

[M]odern graduate-level macroeconomics has managed to bury and forget what earlier generations knew, so that what was billed as intellectual progress ended up being, in crucial ways, intellectual regress. 

Hmmm.... yes and no...

Grad school is trying to produce "productive" scholars, good practitioners of what Thomas Kuhn would call "normal science", who generate publications in academic journals.  As such, much of it, especially the first year, is about learning techniques and terminology.  Most of what I remember from my first year is doing alot of algebra - and that's not a bad thing, being at least somewhat good at algebra turns out to be pretty important, as is knowing about things like Kuhn-Tucker conditions, Hamiltonians, and Bellman equations.

In that sense, I don't think economics PhD programs do such a bad job.  My first year graduate course was mostly growth theory and dynamic consumption theory, which were good vehicles for exposing us to the nuts and bolts of macroeconomic models.  What is missing, is a sense of perspective and context.  Contemporary academic models are grounded in "microfoundations" - the optimization problems of forward-looking agents - and, as such are very different from the models taught to undergraduates.  First-year graduate students learn quickly that macroeconomics is very different from what they expected (i.e., its "micro with time subscripts"), but they don't know why.  Time is precious in putting together a course, but I think a prologue which develops the motivation behind contemporary methods - principally the Lucas Critique and rational expectations revolution - would be time well spent (this article by Greg Mankiw is a good place to start).

DeLong and Krugman lament the lingering prominence of the "saltwater" Real Business Cycle (RBC) paradigm, and they have pointed out some startling statements by prominent true believers.  However, there is good reason for nonbelievers to learn these models, as the methods used by them are also at the core of many state-of-the-art New Keynesian models.

If a PhD program can get its students through some growth theory and consumption theory, which come together in the Ramsey-Cass-Koopmans model, and take the small step from there to RBC models in the first year, those students would be well-prepared to study models with frictions and market failures more relevant to current problems in the second year.

Previously, I have also argued for including history of economic thought in the graduate curriculum.  The trick would be to get people to take it seriously.  This would help recover some of the insight that Krugman (rightly) believes have been obscured.  Moreover, this might get students thinking more broadly, which would improve the likelihood that they might actually be in a position to re-think and change existing paradigms, rather than just being "productive" within them.

A Semi-Defense of the Textbook Money Multiplier

John Taylor approvingly cites a JPMorgan note criticizing economics textbooks' treatment of the money multiplier.  The money multiplier relates the monetary base, which is directly manipulated by the Fed's open market operations, to the money supply, which is what actually affects the economy in most economic models.  The very simple version of the calculation is that the money multiplier is 1/rr where rr is the "reserve ratio" of bank reserves to deposits.

If one assumes a constant money multiplier, then the dramatic increase in the monetary base since mid-2008 implies a huge (and frighteningly inflationary) increase in the money supply.

According to JP Morgan:

The growth of the Fed’s balance sheet, which has been funded by an increase in commercial banks’ reserve balances at the Fed, has sparked fears that the “money multiplier” mechanism would translate those reserves into an explosion in bank lending, bank deposits, and inflation. None of these things has happened, because the money multiplier no longer makes sense given the institutional framework of the contemporary banking system. In spite of being almost totally divorced from reality, the money multiplier is still taught in undergraduate economics textbooks, with much resulting confusion.

While there have been quite a number of changes in the "institutional framework," which textbooks (and professors) may not want to treat in detail, the most basic flaw in the analysis which is being attributed to "undergraduate economics textbooks" is naively assuming a constant money multiplier.

I don't think that is a fair accusation.  Indeed, the only reason why money multipliers are interesting to talk about in class is that they can change.  In normal times, it makes sense for banks to hold as few reserves as they can get away with (they can lend excess reserves on the "interbank" loan market, and if they're short, they can borrow them, too).  But in unusual times, the calculation changes and banks respond to a riskier environment by holding more reserves, which reduces the money multiplier.

This issue normally enters an undergraduate economics course in a discussion of the Great Depression.  Milton Friedman and Anna Schwartz showed that the money multiplier fell during the banking panics of the early 1930's.  Because of the fall in the money multiplier, the money supply actually was decreasing even as the Fed increased the monetary base. This example has become part of the case the Fed bungled the depression. Both the Mankiw and Abel and Bernanke intermediate macroeconomics textbooks discuss this case immediately after algebraically deriving the money multiplier.

The sudden increase in the monetary base (blue line) occurred in late 2008.  In the same period, deposits (red) also rose, but much less dramatically, which means there was a large increase in the reserve ratio.

The Fed announced on October 6, 2008 that it would begin paying interest on reserves.  This is is the dominant factor in the increase in both the quantity of reserves and the reserve ratio.  Interest on reserves does indeed represent a significant change in the institutional framework which isn't included in traditional textbook treatments.

However, looking a little more closely at the graph one can see that reserves began to increase in September.  Reserves rose from $9bn on Sept. 10, to $47bn on Sept. 17 and $104bn on Sept. 24 - a more than tenfold increase over two weeks.  Those two weeks, of course, were the absolute worst days of the financial panic of 2008 (Lehman declared bankruptcy on Sept. 15).  At a time when the interbank lending market suddenly appeared risky, it is not surprising that banks would exercise more caution and increase reserves, thereby reducing the money multiplier.  And that is likely quite consistent with what students read in their undergraduate economics textbooks.

Raise Greg Mankiw's Taxes, Please!

I should start out by saying that I'm a fan of Greg Mankiw.  He has written some important (and good!) papers that have made influential contributions to both business cycle and growth theory.  Moreover, he is a very good writer - his academic work is enjoyable to read (which is rare!) and he communicates well to a general audience (though sometimes his political biases - which are different from mine - do show through).  I've used several of his papers in classes I've taught, and I've been a (mostly) satisfied user of his intermediate macroeconomics textbook since I began teaching the course as a grad student back in 2003.

In a column for the NY Times, he uses himself as an example of how a change in marginal tax rates could reduce labor supply:

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

By contrast, without the tax increases advocated by the Obama administration, the numbers would look quite different. I would face a lower income tax rate, a lower Medicare tax rate, and no deduction phaseout or estate tax. Taking that writing assignment would yield my kids about $2,000. I would have twice the incentive to keep working.

So, if Mankiw's marginal tax rate reverts to its Clinton-era levels as scheduled under current law, when his editor calls to tell him its time for a new edition of his textbook, he would decline?

If we're doing a social cost-benefit analysis of changing Greg Mankiw's marginal taxes, we should account for externalities, positive and negative.  Following Mankiw's lead, I'll use myself as an example, and explain a benefit to reducing Mankiw's labor supply that should be accounted for in his analysis.

I would be better off if he decided the marginal benefit of an cranking out eighth edition was less than the marginal cost, and so would my students.  The churning of textbook editions (and this isn't Mankiw's fault, to be sure) is a real headache to instructors, and helps keep the cost high for students.  Though I'm sure it was well-intentioned (and thoroughly focus-grouped) a number of the changes from the sixth to seventh edition of his textbook made it worse from my point of view.  For example, I rather liked his discussion of New Keynesian and Real Business Cycle theory, which were supplanted by a "dynamic aggregate demand and supply" chapter that I'm not inclined to mess with.  And don't tell me I need my book "updated" for "current events." One of the fun things about teaching macroeconomics is that the world is always giving us interesting new examples to talk about.  But I can handle that quite well without some new "economics in the news" sidebars grafted into the textbook.

However, while the theoretical case that marginal tax rates can change behavior is clear, I'm not convinced, as an empirical matter, that Mankiw's would actually change.  After all, his book was first published in 1992, and he issued new editions in 1994 and 1997 when higher marginal tax rates on high levels of income (and capital gains and estates) were in effect.

Mark Thoma and Brad DeLong suggest some other possible shortcomings in his argument.

Green Shoots

Last week, I took the international trade class outside. Since we happened to be sitting outside the external relations office, photos were taken...Opinions vary about whether I am a good professor, but I sure look like one, if I do say so myself.

The Economics Major

A while back, in the Chronicle of Higher Education, David Colander discussed the surging popularity of the economics major at liberal arts colleges.

Colander recognizes what I think too many people misunderstand about higher education - including many of the educators themselves - that the value is not in vocation-specific training. Rather, as he notes, the "practical" benefits are in developing skills that are broadly applicable, and as a signal. He writes:

Most administrators and non-economist faculty members attribute that appeal to economics' relation to business. They assume that because liberal-arts colleges don't have business majors, the demand for economics is really just a demand for business. To some degree that's right, but it's only a small part of the story.

As part of a report on the economics major that I am working on for the Teagle Foundation, my students and I conducted a survey of more than a thousand students majoring in economics at more than 30 institutions. We found that only 19 percent of the respondents said that the job-training aspect of the economics curriculum had been very important to their choice of major. Moreover, only 36 percent said they were planning to work in business. The others were planning to go on to professional school or work for a nonprofit organization, or had no specific plans. The reality is that at most liberal-arts colleges, economics is taught as a social science far removed from business.

Companies like to hire economics majors from liberal-arts colleges not because the students have been trained in business, but because they have a solid background in the liberal arts. What I hear from businesspeople is that they don't care what a job candidate has majored in. They want students who can think, communicate orally, write, and solve problems, and who are comfortable with quantitative analysis. They do not expect colleges to provide students with specific training in business skills.

If the economics major's popularity is not due to its intellectual dynamism or connection to business, to what is it due? I suspect a mundane explanation: It is the "just right" major. By "just right" I mean that the economics major provides the appropriate middle ground of skill preparation, analytic rigor, and intellectual excitement that students look for in a major, and that employers look for when hiring students.

Consider the results of another question in my survey. We asked economics students to identify majors as hard, moderate, or easy, and we found that 33 percent viewed economics as hard, 3 percent said sociology was hard, 7 percent saw psychology as hard, and 13 percent thought political science was hard. Since other social sciences were the primary alternative majors that most of the economics students considered, that data is compelling evidence that the respondents perceived those other majors as too easy. Students likely reasoned that taking a "too easy" major would signal to potential employers that the student had chosen an easy path through college, thereby hurting their chances of being hired.

Of course, as I've argued before, the real value is not practical at all, but rather that education can help us live "wisely, agreeably and well" (as Keynes put it in "Economic Possibilities for our Grandchildren").

The (In)utility of Higher Education

Stanley Fish writes:

...I have argued that higher education, properly understood, is distinguished by the absence of a direct and designed relationship between its activities and measurable effects in the world.

This is a very old idea that has received periodic re-formulations. Here is a statement by the philosopher Michael Oakeshott that may stand as a representative example: “There is an important difference between learning which is concerned with the degree of understanding necessary to practice a skill, and learning which is expressly focused upon an enterprise of understanding and explaining.”

Understanding and explaining what? The answer is understanding and explaining anything as long as the exercise is not performed with the purpose of intervening in the social and political crises of the moment, as long, that is, as the activity is not regarded as instrumental – valued for its contribution to something more important than itself...

This ideal, he says ruefully, is on its way out:

Except in a few private wealthy universities (functioning almost as museums), the splendid and supported irrelevance of humanist inquiry for its own sake is already a thing of the past.

He goes on to discuss the argument of a new book, "The Last Professors: The Corporate University and the Fate of the Humanities," by Frank Donoghue. One of the main supporting pieces of evidence is the growing use of adjunct and temporary faculty. That may reflect shifting priorities, but I would partly attribute it to Baumol's cost disease - the relative cost of personally delivered services has tended to rise over time because their productivity growth is slow. That is, the price of professors relative to cars has risen, because the manufacture of cars requires much less labor than it did a generation or two ago, while teaching requires about the same amount of human effort.

I think the broader problem, what Fish describes as a "shift from a model of education centered in an individual professor who delivers insight and inspiration to a model that begins and ends with the imperative to deliver the information and skills necessary to gain employment," is more a consequence of the increasing college wage premium.

(figure swiped from Goldin and Katz). Because the gap in earnings between those who hold college degrees and those who don't has grown significantly over the past several decades, young adults (and their parents) have come to regard college as a stepping stone - or obstacle - to "success." It is not surprising that they therefore believe that universities should deliver some sort of "useful" job-specific knowledge.

Unfortunately, many people inside the university seem to make the same error. There are several reasons why they are wrong -

The economics argument would be that college is really a signaling mechanism, as Christopher Caldwell explained in the Times:

But the education kids are rewarded for may not be the same education their parents think they are paying for. Economists would say that a college degree is partly a “signaling” device — it shows not that its holder has learned something but rather that he is the kind of person who could learn something. Colleges sort as much as they teach. Even when they don’t increase a worker’s productivity, they help employers find the most productive workers, and a generic kind of productivity can be demonstrated as effectively in medieval-history as in accounting classes.

Another argument, that I have made before, is that liberal education develops broadly applicable skills, like critical thinking and writing.

But Fish's view is the one that I like best, that seeking to understand and interpret the world is an enterprise of intrinsic value. I hope someday the college wage premium will disappear, so we can overcome the confusion about what we are really here for.

Socratic Solow

Brad DeLong reflects on a semester's teaching with a socratic dialogue on the Solow model; an excerpt:

Akhilleus: So why are you morose then?

Glaukon: Because, looking back over my syllabus this semester, I realized that I spent five full weeks--one third of the semester--teaching them the Solow growth model...

Khelona: It's a fine model...

Glaukon: And yet when the rubber hits the road, it doesn't do us any good. It doesn't tell us anything first-order about the world--aside from post-WWII Japanese convergence from a bouncing-rubble B-29 testfield to a prosperous OECD economy.

Khelona: Actually, I don't think the Solow growth model explains that...

Glaukon: You don't?

Khelona: Post-WWII Japan converged to the OECD norm. And the Solow growth model has some convergence in it--if you start out really poor because your economy's capital stock has been turned into rubble or worse by B-29 strikes, you will grow fast because a low capital stock gives you a high social marginal product of investment and depreciation cannot be a drag on growth if there is no capital to depreciate. But these have always struck me as second- or third-order mechanisms in the story of post-WWII economic growth. Trade. Technology transfer. Institutional reform. The survival of the economic-mobilization components of the fascist Tojo dictatorship. The destruction of the other components of the fascist Tojo dictatorship. The ability of large firms to strike high-productivity bargain with their core workforces by shifting risks onto small-scale producer-suppliers and secondary-sector workers. The neocolonial origins of comparative development--that for Cold War-fighting reasons the U.S. was willing to cut Japan an enormous amount of slack in terms of market access that it was not willing to cut Mexico or Argentina or anyone else outside NATO. You know the story. You know the story better than I do.

Glaukon: Great! So now you've depressed me further--you have gotten me down from one example of the model at work telling us something interesting down to zero....

I also had my students spend quite a bit of time - though not quite a third of the semester - on the Solow model, and I have no regrets. This is partly for the reasons expressed a while back by YouNotSneaky!, who also had the classics on the mind, in a post titled "Socrates would have taught the Solow model":

Socrates thought there were two, maybe three, kinds of people in the world and that you could arrange them in a hierarchy;

1. Those who don't know but think they know.
2. Those who don't know but know they don't know.

and then maybe some lucky ones;

3. Those who know and know they know.

There aren't many people in the 3rd category. But for some reason we always expect our models to move us from the 2nd category to the 3rd. And we're not satisfied if the movement is from the 1st to the 2nd.

The Solow model basically says that "it ain't capital accumulation" which is the cause of sustained growth, it's something else, the magical so called "Solow residual" .....

There've been many people over the years that've concluded that since the Solow model doesn't "explain" growth (because it lumps its major cause into an exogenous residual) it is useless and only an excercise in mathematics.

But people! When you thought you knew (it's capital accumulation!) and then you learn that you don't know (it can't be capital accumulation!) you've learned something just as important and valid as if you've acquired a "positive knowledge"....

Moses Abramowitz called the Solow residual a "measure of our ignorance" - and that is indeed a useful thing. I've posted previously on the joys of growth accounting (measuring the residual).

The Solow model is somewhat unsatisfying because it (i) attributes growth to an exogenous constant and (ii) it does not do a good job of explaining the vast differences in incomes between countries. But it is invaluable as a starting point for teaching economic growth because

• It forces students to really learn some key economic concepts, like:
• the implications of diminishing marginal returns
• the difference between levels and growth rates
• The subsequent research on economic growth - endogenous growth theory and the neoclassical counter-reformation as well as the renewed emphasis on institutions (which admittedly is not really new) - can be understood as attempts to resolve the dissatisfaction due to (i) and (ii).

So while Solow doesn't really answer the questions that we would like growth theory to answer, it is tremendously useful for learning some economics and about how economics works.

The Doctoral Curriculum

The first year of an economics PhD program is notorious for its intensity (I'm still surprised I got through it..). At most schools, it is comprised of one-year sequences of microeconomics, macroeconomics, mathematics for economists and statistics/econometrics. A panel at the meetings last weekend in New Orleans revisited it. The Chronicle reports:

Doctoral programs in economics should radically redesign the grueling first-year course work known as "the core," several prominent scholars said on Friday during a panel here at the annual meeting of the American Economic Association.

Many elements of the core were set in stone shortly after World War II, and the courses have not always evolved to make room for emerging fields of study, the scholars said. They also complained that the courses tend to emphasize the abstract manipulation of equations, with little sustained attention given to real-world problems and data.

"The core needs to have a certain element of fun," said Bo E. Honoré, a professor of economics at Princeton University. "I think it's important that students come out of the first year with a sense of excitement about economics and excitement about doing research."

Looking back, I see the first year as a training camp of sorts, and though it wasn't pleasant, and often didn't seem to have much relation to what I thought of as "economics," it was useful in developing skills useful later in graduate school and in research. In particular, the drill of "abstract manipulation of equations" develops a kind of mental muscle memory for working through the problems economists deal with every day. It was hard to see the point at the time - just like Daniel-san did not understand why he was painting Mr. Miyagi's fence - and Honoré has a point about trying to motivate things better. However, we may not want to make the first year "fun" - some dedication and willingness to defer gratification are necessary to be successful, so its not a bad thing if we chase away some of the people who are not really committed.

One issue that came up at the session was the place of macroeconomics:

"It's not clear why macroeconomics is given an entire year in the core," said Susan C. Athey, a professor of economics at Harvard University and the winner of the 2007 John Bates Clark Medal, which is given biennially to a distinguished economist under the age of 40. "I think macro is very important, but it's not clear to me that monetary theory is more important for everyone to learn than, for example, theories about social-entitlement programs or international trade."

Most of the other five panelists agreed with Ms. Athey, though all conceded that macroeconomics has been a source of models and techniques that have shaped the entire discipline.

The task of defending macroeconomics was left to Michael Woodford, a professor of political economy at Columbia University. Mr. Woodford argued that all economists should learn the dynamic-modeling tools that are taught in macroeconomics courses. "A lot of students find that the macro sequence is the hardest part of the core," he said. "That makes me reluctant to believe that we could radically reduce the length of it and people would still get the important parts."

As a macroeconomist (I wasn't at the panel, because I was attending this session about macroeconomics), I hate to concede that Athey has a point, but I think she does. Although modern macroeconomics is grounded in "micro foundations," the reverse is not true. However, Woodford is correct that many of the dynamic tools taught in first-year macroeconomics have broader application, so some of it is ultimately useful to non-macro people.

One thing that is missing from graduate training is a critical perspective about methodology that would come from a sense of how economics has evolved. I was fortunate to have had some exposure to the history of economic thought as an undergraduate, but it rarely appears in graduate programs. It should. It is rather absurd that we "scholars" of economics know so little about our own intellectual history and never read Smith and Keynes. A core course on the subject might help get us to really think about what we're doing. If I were experimenting with revising "the core" I might reduce the macro to one semester and use the open slot for history of economic thought (which is not to be conflated with economic history - a crucial, under-valued field to be sure, but not one that needs to be in the first year).

Principles of "Principles"

In a NY Times column titled "The Dismal Science, Dismally Taught," Bob Frank relates a familiar experience:

WHEN I began teaching economics in the 1970s, I noticed that people were generally disappointed when they learned what I did for a living. When I began asking why, many said something like this: “I took Econ 101 years ago, and there were all those horrible equations and graphs.”

Frank believes that the teaching of introductory economics is fundamentally flawed:

Their unpleasant memories were apparently justified. Studies have shown that when students are tested about their knowledge of basic economic principles six months after completing an introductory economics course, they score no better, on average, than those who never took the course...

...Why aren’t introductory economics courses more effective? One possibility is that professors try to teach their students far too much. The typical course bombards students with hundreds of concepts, many of them embedded in complex equations and graphs. The mathematical formalism that has become the hallmark of economic research has yielded deep insights. But it does not seem to have helped introductory students learn basic economic principles.

As an alternative, he argues for a pedagogy focused on the repeated application of a small group of principles:

Just as a few simple sentence patterns enable small children to express an amazing variety of thoughts, a few basic principles do much of the lifting in economics. If someone focuses on only these principles and applies them repeatedly in examples drawn from familiar contexts, they can be mastered easily in a single semester.

He may be right, if one takes at face value the idea that the purpose of "Principles of Economics" is solely to impart principles of economics. What his argument seems to miss is that there is a broader purpose to an undergraduate economics course - we are not just teaching economics, we are helping our students learn how to think. This is where that much-derided "mathematical formalism" is invaluable: working with economic models - the process of making assumptions explicit in equations and deriving the implications - helps us learn to connect assumptions and conclusions and think about relationships in a careful, logical manner.

The main educational value of economics lies in the abstract reasoning and quantitative skills the students develop through practice. Other fields cultivate different abilities in their students - e.g. students of English don't merely learn about a set of books, they become more critical readers and better writers. The general point is that the value of a liberal arts education lies not in the body of knowledge students take away, but in the skills and habits of mind they develop when they are challenged.

A couple of subsidiary points:
(i) Frank's argument fits much better for introductory microeconomics than macroeconomics - the factual knowledge in "macro" about how the federal budget and monetary policy work is crucial if we care about what kind of citizens our students will be.
(ii) Though most students of economics (and indeed myself and most economists I know) sometimes lament our reliance on mathematical models, the use of mathematics is absolutely central to economics as it is practiced today. To avoid this for the sake of making it go down easier seems to risk misrepresenting what economics actually is.