An Open Letter From Peter Backus

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:

http://www.ed.ac.uk/polopoly_fs/1.123999!/fileManager/JC_Rochet.pdf

Here is an article by two leading (probable future Nobel winners) Economists about how we should tax the wealthy at a much higher rate:

http://www.theguardian.com/commentisfree/2013/oct/24/1percent-pay-tax-rate-80percent

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.

Peter
Peter.backus@manchester.ac.uk

10 Comments

  1. “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.”

    Okay now, hang on a minute. I’m known for being pretty hostile to both Marx and Marxism but this quote indicates that the author has NO idea what he’s talking about.

    Marx’s writings are about capitalism, NOT about command economies. The socialist command economies were not run using Marxist economics either (if you read Marx you’d know that this doesn’t make sense), they were mainly run on the basis of input-output models in the vein of Wassily Leontief.

    Indeed, many Soviet economists — like Janos Kornai — were heavily exposed to MAINSTREAM WESTERN economic theory.

    There are plenty of valid criticisms of Marx but the above just indicates a severe ignorance of both what Marx was writing about and the history of socialism in the 20th century.

    Reply
  2. The problem with the way economics is taught, or at least was taught to me when I graduated in 1984, is that you end up thinking that neo-classical economics describes the way the real world works. You might even end up thinking that Keynes was right, but without understanding why. As to the first point, it was the article by Arrow and Debreu in the 1950s that defined the conditions under which alone a neo-classical economy could work, conditions that are impossible to realise in the real world. It took the work of Will Hutton and Robert Skidelsky to get me to realise that, at the heart of Keynes’ system was his theory of probability and uncertainty applied to the inherent unknowability of the future and to the role of expectations,money and time.

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  3. Dear Peter,
    I studied engineering at University many years ago and a great deal of the very demanding course has been of no value to me whatsoever other than the study discipline it imposed at the time. I was always puzzled at the time how the non science and engineering students managed to learn enough to pass their exams. Later I understood,they were honing their interpersonal skills of social intercourse in the coffee lounge and the bar.
    It stood them in very good stead as critical first impressions are made very much on the assessment of verbal expression skills where we engineers are lacking due to our hours in the laboratory. But one area where we can claim an advantage from our practical experience is that we can understand positive feedback in a closed loop system causes instability and that fact enables me to know for certain that we are heading for a further crash unless fundamental changes are made to money supply. A great explanation in full detail is shown on the Positive Money web site,please look,it is your chance to make the desperately needed change,
    Modern courses are far too specialised to enable human knowledge to be used to its even partial extent because all professions settle into silos and spend most of their energy protecting the corporate silo from attack,the benefits of cross disciplinary engagement is woefully neglected.

    Best Wishes

    Malcolm Whitmore

    Reply
  4. “a NORMAL curriculum in economics should equitably expose the students to various schools of thought with their respective analytical tools and epistemologies ”

    yes, to the extent that those schools are well represented and respected in the discipline. do you demand your biology lecturers teach creationist theory? eugenics?

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  5. ““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.”

    You’d expect some right wing ignoramus to mention North Korea when others were trying to have a serious discussion about Marx but from a Uni lecturer? Its just appalling!

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  6. Comment from Yuan Yuang:

    “Good that he responded, but I find several of his responses quite strange. In particular:

    1) “Moreover, “Neo-Classical Economics” is not an ideology. Within the “mainstream” there is robust and spirited debate about how the world works.”

    He then goes on to list parts of the neoclassical framework that “all economists” (as he puts it) take for granted. These are precisely the components that have ideological basis. Without getting into a philosophical debate about what ideology consists of (although perhaps that would be helpful at some point in this kind of dialogue), neoclassical economics is a theory of knowledge, and a methodology, that embodies social concepts that are not value-neutral (the concept of a “natural price”, Pareto improvement, etc). That’s what I’d call an ideology (having not studied the philosophy of ideology in any depth, but just my sense of the word).

    2. “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).”

    This is surely beside the point. Marx never set out a policy agenda for reforming the world into a communist utopia (that would indeed be against the point of his historical materialism). But he did set out a bunch of tools for analysing the internal dynamics of capitalist societies. Surely that’s economics, if anything is?”

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  7. Thank you Peter for taking some of your valuable time to write this open letter.

    As far as I see it, two important themes seem to be present in this discussion. One is an effort to bridge the gap between undergraduate and academic economics. Second is an attempt to incorporate other social sciences in the undergraduate economics curriculum. Perhaps not many have issues with the former.

    I was surprised to read PCES Petition which suggests that Manchester economics students ‘are not educated to the standard that they deserve and their employability is harmed’. Although many university programs offer optional units of heterodoxy, virtually every economist hired by policy analysis institutions, industry, governments or banks has their core training in the standard curriculum.

    I was also surprised to see that PCES takes the view that ”in most courses ‘economics’ is shorthand for ‘neoclassical economics’ and there is no recognition of the fact that economics is a discipline that consists of a variety of schools of thought” (see Petition)

    This begs the question: What is economics about? And is it really dominated by the neoclassical paradigm? The striving for the monopolisation of epistemic authority is the basic force driving scientific competition. Yet is it actually true that economics tends to be dominated by a single approach? Or does it already reflect a pluralism of approaches?

    The reality is that in the last two decades the economics research frontier has been significantly transformed by the emergence of a large set of new approaches which criticize traditional neoclassical assumptions, and whose origins lie largely in other sciences and disciplines. These approaches include: game theory (behavioural/ evolutionary/ classical), evolutionary economics, behavioural economics, neuroeconomics, and agent-based computational or complexity economics. Orthodoxy usually emerges from heterodoxy. However, economics does not and should not accept verbal argument as a substitute for rigorous modelling. It is therefore committed to an axiomatic style. Furthermore, like any living institutionalized tradition, mainstream economics is fuzzy on its boundaries.

    All disciplinary establishments rightly attract critical thoughts. PCES’ efforts are really just a continuation of a tradition of critique of how we think about economics and how we do economics. This tradition goes back to Lakatos and Feyerabend’s methodological anarchism, to Caldwell’s case for methodological pluralism, to Ormerod’s Death of Economics to …well, I will let PCES fill in the blanks.

    Charles
    Birkbeck Economics & Finance Society

    Reply
  8. The demand that economics students are making for a critical framework for the undergraduate curriculum is very welcome indeed but very overdue. The regression in Social Scientific methodology through its reduction to a quantitative paradigm since the neo-liberal coup d’etat of 1980, is reflected across the curriculum for virtually all subjects, even the Humanities such as English have been shredded of substantive critical enquiry. With the mechanization of curricular knowledge through various mensurable techniques such as bench marks, performance appraisal, the commodification of compulsorily assessable course work to fit byte-size course work.
    All of this individualizes and privatizes university studies rendering the student a passive and graded product instead of the active character-formed human persons that should imperatively prevail in Higher Education. Neo-liberalism presents us with a bleak and miserable landscape of ruins wedded as it is to Social Darwinism and the survivalist warfare of each against all. Nowhere is this bleak practical materialism more dominant than in the weird figurations of university Economics Departments increasingly funded by oblique foreign donors.
    I learned my Economics as part of an External London University degree in Sociology in the New Deal days when Keynes and Marx fed into a holistic and critical pedagogy leading to a generally creative tension in the discipline. There was no overall quantification of knowledge and interpretation and theory was as important as the very good statistical stuff produced by Lipsey for example. I was taught Philosophy(largely Social Philosophy) alongside both economics and Sociology.
    I would like to take issue with Peter Backus, whose analysis I neverthe less found enlightening about Economics, Peter says that Marxist theories are no longer relevant because we no longer live in a Command economy. Well I take dispute with that assertion. We live in an economy dominated by a series of Corporate Command structures. What are transnational Corporations other than Command structures, top down hierarchies with no flexibility of control in which labour is calibrated to a rigorous compliance from recruitment onwards. Such Corporations have frequently downsized, delayered, outsourced, getting rid of personnel by the thousands and recruiting increasingly volatile non-contracted personnel. The neo-liberal Command economy today is as rigid both politically and economically as were the Communist economies, except, of course, they don’t protect their citizens from the harmful and violent dispossessions of market ideology leading to a Sovietisation, nay Nazification of the British State in particular. So Peter Backus I have to dissent from your view on that particular point, Corporations resemble armies in their organization, and market strategies.
    Well done though to the students of Manchester university Economics Department and other students who have begun to see the light through the darkness of the ruins of deregulated neo-liberalism. Please see the job through and i give you my wholehearted support.

    Reply
  9. Economists these days deal with nothing but policies, which are of immediate interest to politicians or businesses because that’s what pays one to be an economist outside the mundane profession of teaching. It would be wrong to say that the economic phenomena are not fascinating enough. Economists have stopped paying attention to it because of their lack of understanding on the one hand and the absence of attractive returns on the other. The Nobel Foundation has indeed done a great disservice to economics by recognising only those who wear the cloak of mathematics.

    Economics is the most fundamental of all sciences because one will have the opportunity to pursue any other science only when one’s own survival is secure and only when scientific researches are economically feasible. It is because of this reason, the US had to cut down heavily on its space research. When companies face difficulties it is R & D expenditure, which goes under the guillotine first. Economics determines the feasibility of everything.

    What most economists fail to recognise is the fact that economics dictates the limits of all laws, relationships and governance frameworks. Any person, economy or empire, which does not understand the basic economic phenomena and fails to abide by its invisible rules will go under. It is not as if economists are completely unaware of it. They just do not understand it and they call it the ‘invisible hand’

    It is when people’s greed fail to pay heed to the needs of the economic phenomenon, economies get shaken up at the roots. Economic phenomenon did not spare even the greatest empires in history to flout its rules. It will not allow any country to ignore its basic principles, how ever mighty these countries might assume themselves to be.

    It is a pity that persons who do not understand the economic phenomenon or do not care to study it claim themselves to be economists. I am running a campaign for re-writing economics for more fundamental reasons. You may view more of my arguments at https://www.linkedin.com/today/post/article/20140622113422-17589031-is-it-time-for-rewriting-economics?trk=mp-reader-card

    Reply
  10. Economics is a science of collective living – although it is misunderstood often as license for individualism and capitalism. It stems from the fundamental truth that humans cannot survive alone. This is what most contemporary economists do not understand and acknowledege

    Every human being requires the cooperation other living beings – without which life will come to naught. It may the mother whose cooperation that the child will need, to start with. But, the sphere of cooperation becomes infinite as our wants and desires proliferate. Economics teaches how people can adopt the advanced principles of economies of scale and scope to maximise the benefits of such collective action.

    In early days though, collective living was ensured primarily by force or extortion. Economics then offered an alternative to the destructive wars that empires and kingdoms waged to plunder the wealth of others to fill their own coffers or to subjugate citizens of conquered territories as slaves for building their palaces and monuments.

    Economics showed that nations can accumulate wealth without plundering the neighbour or by robbing Peter to pay Paul. Collective value creation is the innovative concept, which economics added to the existing pool of human knowledge. It is value creation, which supplies the energy for the economic engines to keep running.

    The essential purpose of economics is to serve as a science of social provisioning by establishing the norms and principles of successful collective living. As much as medical science is devoted to saving and supporting the physiological life of people, economics is committed to securing and advancing the economic life of people and societies.

    There are rights and wrongs in every science. Economics has its own set of Do s and Don’t s. What most people do not recognise is the basic truth that principles of economics, which are essentially the requirements of collective living will supersede every other norm and principle in the end. All economic problems will therefore need to be resolved before societies reach such fearful ends.

    Reply

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