Peter Backus, one of our lecturers here at Manchester, invites you to engage in an open discussion about the current standings of our Economics education. In this open letter to the PCES he has presented to us his personal opinion on the academic teaching of Economics. We believe an insight into such an alternative perspective can greatly nourish our understanding of the PCES debate, and we’d like to thank Peter for taking the time and consideration to share his ideas with us.
I read, with great pleasure, the articles that ran in the Guardian a couple of weeks ago about the PCES here at Manchester. I was particularly impressed with the PCES’s response to the original article, which was designed to clarify the Society’s position, as it was not accurately depicted by the Guardian.
The week before these articles ran, I gave a short talk at the MUTIS Finance Society Conference here at Manchester and I had an interesting chat with a student there. My talk was mainly about my time at university (1996-2000) when the stock markets did nothing but go up and how growing up in that world shaped my thinking. The student I spoke with said he thought it was an interesting thing to think about especially since that world is essentially the total opposite of the world in which your generation grew up, where economic Armageddon was all around you. This really struck a cord for me and a penny dropped for me about the PCES.
I realised that you guys (meaning people around your age) really have no reason to put any faith in Economics as a social science. For the vast majority of you, your experience of Economics prior to coming to university will have been corrupt financiers, Economic collapse, high and sustained unemployment, stagnant real wages, collapsing asset prices, falling housing prices etc etc. Your experience of economists will largely have been through the news media, with various commentators, pundits and experts predicting this or that for a firm’s share price or for the economy in general or declaring with great authority that austerity or spending will inevitably resolve our nations’ economic woes.
In response you rightfully ask, “Hey, did nobody see the crisis coming? How did you guys miss this? And why aren’t you spending more time trying to figure out what went wrong? Why are we still reviewing the same ideas and models that got us into this mess?”. These are important and valid questions to which we all deserve answers. But they are also complicated questions. And complicated question tend to have complicated answers.
So, I wanted to share couple of thoughts in response to both the article and to (my interpretation) of the PCES’s raison d’etre. Just a quick disclaimer; what follows are my views and my views alone. They do not necessarily reflect the views of the university, school, faculty, or DA. So if anything here seems a little too bananas, blame me.
First, in your efforts to reform Economics education, you need to be clear about what you think Economics is and why people study it. Some of the things you guys have expressed and interest in (say, more history of econ modules) are really more Politics/Political Economy/History/Political Philosophy and already exist there to some extent. Economics has become over the last couple of decades less about BIG ideas (e.g. capitalism v Marxism) and more about a set of analytical tools both theoretical and applied. Yes, the skills we teach prepare people for City jobs. Those jobs are highly quantitative and require a certain set of skills that Economics provides. But learning Economics prepares one for any number of careers. Economics provides you with a set of tools with which you can analyse the world. It is training in how to think; about the economy, about incentives, about how people make decisions. It does not teach you what to think. This is a distinction that we as educators might do a better job of making. When we teach you to “think like an Economist” we are not teaching you to think what and economist thinks, but rather think with the care, rigour and structure that an economist thinks. Let me ask you, do you feel that your Education fails to achieve this aim or that you want your Economics education to have different aims? If it is the latter, it may be the case that a different degree course would have better suited your interests.
Second, Economics is not a monolith and so criticism of “Economics” or “Neo-Classical Economics” is, at least partially, misguided. There is a lot of disagreement among economists about pretty much everything. The Nobel this year was awarded to two guys who suggest opposing and largely incompatible theories. We celebrate intellectual discourse and disagreement in Economics. This makes it difficult to change, criticise or debunk “Economics” because “Economics” is not really one thing, but rather an esoteric collection of ideas and methods, an amorphous blob of a social science. Economics is not an ideology, there are ideologues in the social science, but Economics itself is not an ideology. It is, generally speaking, a quantitative social science and sometimes it is not even that. I think the best way to describe Economics is that it is a formal conversation about how people behave.
Moreover, “Neo-Classical Economics” is not an ideology. Within the “mainstream” there is robust and spirited debate about how the world works. Rogoff and Reinhart argued that austerity was a key to a recovery. Paul Krugman argued the exact reverse, saying that the fiscal stimulus in the US was insufficiently large. There is hardly uniformity of thought, even among “mainstream, neo-classical” economists.
But Economists do generally agree on some things. We tend to agree about certain empirical methods needed to identify causal effects. We usually agree theoretical models can be useful with clearly stated assumptions and conclusions that follow logically from those assumptions. We also tend to agree that a utility maximising framework is a very useful tool for understanding how people behave. We tend to agree that theoretical models must be tested empirically over and over again, that assumptions must be relaxed and conclusions re-drawn to test how sensitive our original conclusions are to the assumptions made. We agree that mathematics can be a powerful tool for clarifying one’s thinking about complex issues like human behaviour. Our disagreements usually take place within this agreed upon arena, though debates do sometimes fall outside of it.
Third, the question about why Economics did not predict the crisis, a point made repeatedly by critics of Economics, is, I think, somewhat misguided for a number of reasons. This is a complicated issue in itself, so let me digress for a minute.
• What do we mean by “predict”? The timing of the crisis? The severity? The causes? All three? The tools of economic forecasters do not include the Oracle of Delphi. Perfect pre-cognition is beyond the capabilities of humans and certainly beyond Economics. And remember, just because someone was correct about something they said was going to happen does not mean they have the ability to predict the future. For example, if someone predicts a recession every year, eventually they will be right. Does that mean they have a better understanding of how the economy works than someone else? Another example, if some one says “at some point in the future, the economy will take a turn for the worse.” And then 10 years later the economy takes a turn from the worse, is that person a genius? If I am to believe someone’s claim that they “predicted” the crisis, I need to see evidence that they stated the timing, severity and causes of the crisis before the crisis. An added bonus would be that A) they have not made dozens of other predictions which turned out to be wrong and B) they profited from their prediction (i.e. they put their money where their mouth is).
• Although people cannot perfectly predict the future, many people felt that the situation in the months and years leading up to the full-blown crisis in 2008 was unsustainable and that some sort of trouble was on the horizon. The US stock market started to fall in late 2007. The banks themselves seem to notice problems in the economy as they started “shorting” the housing market in various ways. One of this years Nobel laureates (Shiller) was among those who were concerned about the direction of the US economy early on. Raghuram Govind Rajan (hardly an anti-establishment figure, he did his PhD at MIT and has advocated fiscal austerity in response to the crisis) presented a paper in 2005 which outlined the mechanism through which various financial instruments could, and eventually did, create a financial crisis. So, many people were aware of problems in the economy. But this is NOT prediction. Moreover, since we do not have unanimity of thought, others did not see things the same way. Those people (including several, well respected economists) were wrong, the Govind Rajan and Shiller were right.
Personally, I would argue that the thing that caught people off guard was the pace and severity of the crisis in 2008. That the economy was headed towards (or already in) recession in the Fall of 2008 was generally agreed upon. The pace and severity were largely the result of over-leveraged banks and financial instruments like Credit Default Swaps, that frankly not many people understood very well.
• While it is true that a small subset of economists work on macroeconomic forecasting, it is generally not the job of an economist to predict the future. So, even if those people could predict the future perfectly (which they cannot) it seems inappropriate to fault the entire subject for this. Forecasting is an art as much as it is a science. Given a world full of randomness and complex interconnections, macroeconomic forecasting is extremely difficult and does not have a reputation for being overly accurate. They are not oracles. Moreover, other sciences (social or otherwise) are not burdened with the responsibility of clairvoyance. Geologists don’t predict earthquakes, climatologists weather predictions are infamously poor, English professors do not predict (or even produce) best-sellers, even quantum physicists, who work with time itself, cannot predict the future. So, why do we expect economists to be perfect soothsayers?
Another key point is that when economists do forecast, the forecasts come with confidence intervals. That is an economists at a central bank may forecast GDP growth of 3% next quarter. This is the number that gets reported in the news. But what is too often not reported is the confidence interval. The economist may have forecast growth of 3% with a confidence interval of 4 percentage points. So, really the economist cannot even say that the economy will experience positive growth next quarter. This is, I think, a profound failure of financial/business reporting and of how statistics are presented to the public.
Ok, enough about prediction.
Fourth, many of the underlying causes of the financial crash were political and regulatory and structural, not the fault of sloppy Economic thinking. People respond to incentives, and financiers were responding to incentives that rewarded short-term gains with higher levels of risk. Governments failed to regulate markets for new financial instruments, political leaders appointed former financiers to regulatory roles. A number of things went wrong, to blame the Economics as a subject or Economics education is to fail to understand this. Personally, I believe our governments failed us (and continue to do so) by failing to regulate the financial sector.
Fifth, a LOT of what you guys learn as undergraduates is based on Keynes. The article made it sound like you guys think Keynes was some fringe thinker that gets little attention nowadays. This is simply not the case. Almost all your first and second year macro is Keynesian. IS-LM analysis, the multiplier, fiscal policy in general are all Keynesian. There are other schools of thought, other interpretations of Keynes (e.g. Post-Keynsians) and we might make more of an effort to at least allude to these in our teaching. However, it is the job of the lecturer to determine which theories are most important to present. It is the job of the student
Sixth, I am happy to discuss and debate Marx and variants of Marxism with you. Historically he is a great and important thinker. However, he is less relevant to modern societies and economies as we have abandoned command economies for the very simple reason that they do not work. Don’t believe me? Take a trip to North Korea. Take a trip to Cuba (I have). While his ideas are intellectually appealing but Marxist theories have not found success in practice. Moreover, there is no such think as Marxism per se, there are a number of versions of Marxist thought just as there are a number of versions of capitalism.
Lastly, Economists are always trying to do better! We are always revising theories, debating alternatives, testing models, debating policy and improving methods. Here is a recent paper that questions the idea of profit being the objective function of firms, one of the bedrocks of Welfare Economics:
Here is an article by two leading (probable future Nobel winners) Economists about how we should tax the wealthy at a much higher rate:
But in the case of the first paper, you need A LOT of maths under your belt to understand it and so you need to study a lot of maths. But despite Krugman’s claims, while maths clarifies thinking it does not reveal truth in isolation. If our mathematical model reveals something that is totally un-intuitive, we need a way to explain it. Otherwise the model is no good. And as an aside, Krugman’s Nobel was awarded for work in trade theory that was HIGHLY mathematical and did reveal some interesting truth (or rather provide rigour and structure to existing ideas)!
The last thing I will say, or ask of you rather, is that you give us the benefit of the doubt. Just a little. All your professors have been studying Economics a lot longer than you have. We are not members of some powerful cabal guiding the economy in such a way to increase corporate profits. We are not tools of the elite. We are not brainwashed automatons cranking out status quo affirming research.
We are people who are passionate about understanding poverty, the effects of education, wage inequality, the effects of fiscal austerity on the poor, the effects of financial deregulation, the relationship between income and health, altruism, gender relations, race relations, risk, how to improve people’s access to education, health care and higher incomes, how to limit pollution, immigration, and on and on and on. Moreover, we are so passionate about these things we want to tell you guys all about it! Many of us selected into an academic career because we want to share our interests with students. We want you to see and understand and be amazed by how interesting the workings of the world can be. And Economics can provide powerful tools for understanding those workings. The first time I saw a really counter-intuitive result in Economics was like magic.
We don’t expect, or want, you to take everything we say as gospel. But please try to have a little faith that we are teaching you things for a reason. If you have doubts, ask us questions! In tutorials, in lectures, in my office, say “Peter, I think X is nonsense and here is why!”. And then we can discuss. As I said, Economics is really a conversation. And I am very much enjoying the one we are having.