A difficult thing that I ask my students to do is to parameterize everything.
The ideas that my game theorists come up with for applied theory projects are uniformly great. The puzzles they want to study are rich with potential, and many are easily original enough to be of publishable grade.
Compared to coming up with ideas, kicking it up a notch into something that looks like an economics paper is much harder. There are two main hurdles:
I read today David Colander’s article How to Market the Market: The Trouble with Profit Maximization and ‘s response in the most recent issue of the Eastern Economic Journal. By coincidence we’re also talking producer theory in my economics 101 class right now, so the timing is good. I favor Colander.
As the 101 story goes, profit maximization plus the assumptions of the perfectly competitive model generate maximal efficiency in the hypothetical economy. The Colander article establishes the historical context, entwined with the formal mathematical turn in economic theory and the methodological-ideological mashup of “free market” economics circa Friedman.
My feelings on the use and abuse of “efficiency” as a concept are well established. On top of this we have the evidence that learning about profit maximization induces students of economics and business to answer moral dilemmas involving hypothetical businesses differently than other people.
Something that bugs me is that I feel like “business” gets a pass on things that would never fly in other walks of life. I mean, sure United Airlines gets a justified backlash when a passenger is violently concussed on one of their flights, but the subtext is “well, yeah, they’re trying to make money.” Albert Burnenko was on to this at Deadspin after the United incident. The motives of the corporation are taken for granted to be inhuman.
In politics, behavior that would sink a typical politician a hundred times over rolls off the back of an “outsider” candidate from “the world of business”.
I struggle to think of examples from books, movies, or television in which firms, business, corporations—whatever you want to call them—are the good guys. Instead if you’re consuming the culture you’re getting a creeping collective paranoia about the callousness of the profit motive. This is what Angela Allan is getting at in this Atlantic article that I continue to assign regularly. I realize that the people who create art may have a particular perspective distinct from the average businessperson or person-on-the-street, but if culture creates and reflects itself then corporations are not the heroes of this story.
Damodaran concludes his response like so:
Implicit in that statement is the presumption that talking about private businesses making profits makes people feel queasy, a presumption which may be justified in the rarefied air of some parts of Vermont but it is not true in the rest of the world!
I don’t agree with this at all. Every semester I try to have my students think about what connotations they and their peers are carrying about “business”, “corporations”, “profit”. The connotations of “big business” are not positive. Economics is infected by association, and I know what the average person thinks of economists.
Or, more nuanced, the idea that a corporation is a callous automaton that is supposed to do whatever it can get away with to make as much profit as possible is so baked in that it doesn’t even seem like a bad thing anymore.”Of course” businesses are supposed to try to make as much money as possible, right?
On the other hand, Damodaran is quite right that there is nothing new in human suspicion of the pursuit of wealth just because economists came to adopt profit maximization into the canonical texts. It’s just another one of those aspects of our methodology that gives us a pedagogical PR problem.
I find profit maximization a lot riskier and more nefarious in econ 101 than utility maximization. It’s too real. It’s tricky enough to tease out the technical meaning of rational choice and preferences to sell utility maximization properly, but this ultimately lets profit maximization off very lightly since it doesn’t require the same technical ramping up. It just feels too obvious, and so I find myself having to work twice as hard to give it the interrogation it deserves. There’s no getting around either of them if you want to teach general equilibrium and the welfare theorems, and of course we do. I worry about the proportionality.
I also find it interesting the advent of behavioral economics has mobilized so much energy beating up on utility maximization, and the 20th century debates on profit maximization that Colander describes have given way to consensus. I think this is way out of proportion with the funkiness of the concepts. Utility maximization is abstract and flexible in way that profit maximization just is not. Profit is a real thing in the real world, very close to the model version of profit in its definition and spirit. Utility is not. Maybe we could pick the straw man of homo economicus up from under the bus, since I for one am much more relaxed about selling rationality than I am about selling profit maximization.
Dodgy economics is flying around left and right as the new GOP health bill is being piñata-ed from all sides this week. One particular strand is the charge of economism in the political rhetoric around healthcare. I want to talk a little about that since it relates to the teaching of introductory economics. In sum I want to claim that there is no great crisis in econ 101 being reflected here, but that there are reasonable grounds to suspect that marginal changes could have a big impact in how the median econ 101 student absorbs our material.
I talked in the summer about my goal of integrating a broad welfare economics component into Econ 101. I had at best a qualified success. The biggest challenge was the ubiquity of the efficiency metric in the 101 canon.
After my first semester teaching Econ 101, I have lots to digest. I’ll post thoughts here over the next few weeks as I go through the process of revising for the second go-around.
Sometimes the story is so good that you forget it’s just a story.
I’m wondering today, on an otherwise lovely Friday, how soon to introduce welfare economics into an introductory economics course.
I know. Bear with me.
I think one of the most fundamental jobs of introductory economics is to start to build the famous “invisible wall” between positive and normative economics. The textbook distinction is between questions about the way the world is—positive—and the way the world ought to be—normative.
As I continue my summer-long vision quest to build the platonic ideal of an Econ 101 syllabus (kidding… maybe?), I’m thinking about modeling, representation, and narrative.
The question at hand for the course is how to balance “received wisdom” versus “how we do things”. I’ve always found one of the hardest things to get across in teaching economics the idea of modeling.
From Tim Barker’s review of Johanna Bockman’s Markets in the Name of Socialism:
The Left-Wing Origins of Neoliberalism, which is currently waiting in my to-read line:
Her real focus is the relationship between socialist politics and neoclassical economics. As her intellectual and political history deftly illustrates, there is no inherent affinity between neoclassical theory, market institutions, and capitalism. (Here she offers a corrective to Marxists like Harvey, whose key text on neoliberalism conflates it with neoclassical economics.) The pioneers of neoclassical economics recognized the relevance of socialism to their project and assumed that one scientific vocabulary could therefore apply to socialism and capitalism.
The conflation of an ideology with the pervasive methodology of economic theory is a disheartening one. It bleeds into the quandaries of teaching introductory economics, into the otherwise valuable methodological critiques and innovations within economics, the characterization of economists as evil.
I submit that (i) we have two words that are slippery to define and both start with “neo-“, and (ii) “economics” is sometimes taken to connote “business” and soulless bean-counting, and so we are stuck with a misconception that I very much wish we could shake.
This conflation is not acceptable to me and I don’t see any easy way to battle it. I do think it argues in favor of an unapologetically wonky Econ 101 that explicitly includes more fundamental methodology, whatever the cost. We must teach our methodology properly if we want it to be interpreted properly.
Isn’t this just a marvelous observation:
What sex is to the biology classroom, stocks and investment riskiness is to the sophomore economics lecture hall. That chapter on personal finance, put there to keep hard-boiled MIT electrical engineers awake, helped make introductory economics the largest elective course at hundreds of colleges.
That’s from Paul Samuelson’s article (pdf) discussing the 50th anniversary of the publication of his economics textbook. What a perfect quotation it is: students enroll in economics courses to learn about the stock market, despite it being, really, secondary to the discipline, and by indulging them we made economics courses wildly, unimaginably popular. Even Samuelson saw it!
Then again, Samuelson seemed to see a lot of things more clearly than most. Justin Wolfers at the Freakonomics blog discusses the textbook, and says this:
And while modern textbooks typically begin with a list of the dozen or so key lessons of economics, Samuelson begins with a single claim: “The first lesson in economics is: things are often not what they seem.”
This is the enduring brilliance of Samuelson’s book. He would never have had the audacity to write down a list of “principles” in some misguided attempt to simplify or to circumvent argument or to hook a bored student; he discussed, sensibly, correctly, reasonably, lucidly. Even after he delivers his “first lesson” in the first chapter of the book, Samuelson gives a few examples then says:
…each of the above seeming paradoxes will be resolved. Once explained, each is so obvious that you will wonder how anyone could ever have failed to notice it. This again is typical of economics.
That’s how it feels to study economics. Things might not at first be what they seem, but soon they are revealed to be exactly what they seem, and my goodness how did it ever seem otherwise.
That first chapter is rightly championed by Wolfers. It shows precisely why it’s such a tragedy that Samuelson’s textbook doesn’t still dominate, why it’s a tragedy that we now have textbooks that put the cart before the horse and show questionable “principles” up-front rather than discussing what’s about to happen, then developing them patiently. Can this be beaten:
It is the first task of modern economic science to describe, to analyze, to explain, to correlate these fluctuations of national income. Both boom and slump, price inflation and deflation, are our concern. This is a difficult and complicated task. Because of the complexity of human and social behavior, we cannot hope to attain the precision of a few of the physical sciences. We cannot perform the controlled experiments of the chemist or biologist. Like the astronomer we must be content largely to “observe.” But economic events and statistical data observed are unfortunately not so well behaved and orderly as the paths of the heavenly planets. Fortunately, however, our answers need not be accurate to several decimal places; on the contrary, if only the right general direction of cause and effect can be determined, we shall have made a tremendous step forward.
There you have a perfect, simple explanation of the problem of measurement. Here’s more, this time on positivism and its limits:
At every point of our analysis we shall be seeking to shed light on these policy problems. But to succeed in this, the student of economics must first cultivate an objective and detached ability to see things as they are, regardless of his likes or dislikes… there is only one valid reality in a given economic situation, however hard it may be to recognize and isolate it. There is not one theory of economics for Republicans and one for Democrats; not one for workers and one for employers…
This does not mean that economists always agree in the policy field… Ethical questions each citizen must decide for himself, and an expert is entitled to only one vote along with everyone else.
Reading that collection of reminisces (same pdf as earlier) on the 50th anniversary of the book, I’m humbled again by how groundbreaking Samuelson’s textbook must have been. We must fight, fight and fight over again to make sure that the foundations of his book – the true principles of economics – live on and on.
Jim Campbell 