Minggu, 30 Desember 2018

Sumner on teaching economics

Scott Sumner has a terrific post on teaching economics. (HT Marginal Revolution)
The core ideas of economics are extremely counterintuitive and are not accepted by most people....
Non-economists also tend to reject the central ideas of basic economics, and for reasons that are not well justified. [In particular these central ideas do not rest on hyper-rationality.] For the economics profession, our “value added” comes not from spoon feeding behavioral theories that the public is already inclined to accept, rather it is in teaching well-established basic principles of which the public is highly skeptical.  Thus we should try to discourage people from believing in the following popular myths: 
1.    People don’t respond very strongly to economic incentives.  (I.e., the demand for life-saving drugs is very inelastic.) 
2.    Imported goods, immigrant labor, and automation all tend to increase the unemployment rate. 
3.    Most companies have a lot of control over prices.  (I.e. oil companies set prices, not “the market”.) 
4.    Policy disputes over taxes and regulations are best thought of in terms of who gains and who loses. 
5.    Experts are smarter than the crowd. 
6.    Speculators make market prices more unstable. 
7.    Price gouging hurts consumers. 
8.   Rent controls help tenants. 
These myths are all widely believed by the general public.
Our primary goal should not be to add new information, it should be to have people unlearn false ideas about the world.
My emphasis.

One is tempted to add to the list. (An invitation to comments.)  Many of them stem from a basic principle -- "find the supply response" or ("demand response") that the fallacy ignores. "State the budget constraint" is another good habit.  Look for competition, entry, and choice among alternatives -- a market is not just bilateral negotiation. I might add reverse causality and selection bias -- empirical economics has stories to tell as well.

Scott frames the essay as a reaction to an Atlantic story advocating more teaching of behavioral economics. Scott is very clear: he is not opposed to behavioral economics. (He will likely be misquoted on this. Some behaviorists are very touchy. I know this from painful experience.) He is merely opining that our profession has more value added in teaching regular economics first. Regular economics is harder, less intuitive, less known, and therefore more valuable. To really understand behavioral economics, you have to understand what it is behaviorists object to -- and the vast amount of regular economics that good behaviorists agree with. Art schools might do better teaching people to draw, music schools to teach classical before atonal, physics programs newtonian before quantum mechanics, and so forth.
Most people find the key ideas of behavioral economics to be more accessible than classical economic theory. If you tell students that some people have addictive personalities and buy things that are bad for them, they’ll nod their heads.  And it’s certainly not difficult to explain procrastination to college students. [Dave Henderson's nomination for best sentence in the essay!] Ditto for the claim that investors might be driven by emotion, and that asset prices might soar on waves of “irrational exuberance.”  ... One should spend more time on subjects that need more time, not things that people already believe. 
I.e. let us not indulge in our own quest for teaching ratings via confirmation bias.

Yes, people do nutty things. But if you approach rent control, and all you have in the back of your head is behavioral stories, you will miss the clear prediction, borne out time and time again, that within a decade there will be a massive shortage of rental housing.

Scott does not neglect how awful most economics courses are
That doesn’t mean that I agree with the way that economics majors are currently being taught.  Our intermediate level courses are far too theoretical; they waste students’ time on lots of minor theories that would only be useful for people planning to do graduate work in economics.  (Most students do not.)  Too many homework problems with Cobb-Douglas utility, Hicksian demand, marginal rates of substitution, Giffen goods, gross substitutes, indifference curves, etc.  Some of that is appropriate, but all economics courses should focus heavily on applied economics. 
Most students come out of such courses still unable to coherently judge Scott's nice list of fallacies. Most of our courses are histories of thought, "greatest hits" of past theoretical contributions, passed on rather mindlessly. We teach many harmful parables. For example, natural monopoly due to increasing returns to scale, and the need for resulting regulation is a staple, passed down from about 1910. It has little to do with modern industrial organization in a global economy.

In part, it's easy to get through an hour by moving the curves around. Teaching real applied cases is much harder.

Macroeconomics teaching is in worse shape. Keynesian macro, like behavioral economics, enshrines most people's intuitive fallacies. Consuming more will increase output - forgetting the budget constraint. Breaking windows is good as it gives employment to window repair people. Good Keynesian macro justifies these apparent fallacies with carefully described "frictions," by which classical economic results fail. But you have to understand those classical results first to arrive at a correct economics that recognizes frictions (like behavioral biases) but doesn't violate budget constraints and accounting identities. Most macro teaching consists of young professors pushing IS-LM curves around, though such curves appear nowhere in their own research, nor anyone else's since the time they were born. Well, it passes the time easily.

An important point is implicit. Economics is not hard because of math. The math in even graduate level economics is no greater than in sophomore physics. Classical economics is hard because it can attack social problems in a value-free, cause-and-effect way, and upends the little morality stories that most people use to think about those problems -- rents are high because landlords are greedy. "Learning to think like an economist" is indeed best learned by application. And "learning to think like a behavioral economist" requires learning to think like an economist first.