2 Dec 2015

Rethinking how (micro)economics is taught

Yeming writes*

Microeconomics is a highly technical subject which is often thought to be a ‘value-free science.’ Hence introductory courses typically do not focus on debates in the field and proceed as if everything is settled and agreed-upon. However, this is a myth, because value judgements pervade economics and economic textbooks. The very definition of economics, as the attempt to satisfy unlimited wants with limited resources, is already grounded with judgements about what makes human beings happy. For example, it shifts our attention towards efficiency and away from questions of equity, often invoking the compensation principle in cost-benefit analysis to justify efficiency-enhancing policies. It is these value-judgements that I think should be made explicit and therefore students should also be exposed to alternatives.

Mainstream microeconomics courses and often economic courses in general tend to idolize the market. It describes a world of perfect markets in which given resources are allocated as if by an invisible hand in a way that maximizes utility. This idea is referred to as ‘market fundamentalism’ and is implicit in most (micro)economics courses that I have taken. Also, it is often times presented as a one-size-fits-all model, with demand and supply as the central theoretical structure. However, the demand and supply framework is actually a simplified representation of only perfectly competitive markets, because the supply curve does not exists in non-competitive markets. (why? read here) Then, considering the prevalence of imperfect markets in the real-world, students should be aware that applying the demand and supply model only functions as an approximation, which can sometimes be justified, but not always!

Furthermore, we have the assumption of perfect rationality. Rationality assumes that individuals are able to choose from a complete space of goods, know what their preferences are, are able to rank their preferences, and have transitive preferences, such that one never contradicts oneself. However, where do these preferences come from is often neglected and although behavioral economists have demonstrated that individuals often yield to emotions and operate on rules of thumb, a continuous reliance on mainstream economics and rationality will not help students to understand real-world economic phenomena. Something that also former-Fed chair Alan Greenspan experienced (link).

Perfect information is another such assumption, which for example my microeconomic textbook does not address at all.** Recently, much research has explored the implications of relaxing this assumption and the result is that when pervasive informational problems exists, which is quite common, the market economy systematically fails to produce the efficient allocation of resources, which is normally the focal point of many microeconomic textbooks, as argued earlier.

What I am then suggesting is not that mainstream economics is bad or wrong, however I would like introductory courses to microeconomics and economics in general to remind students that economics is not a science. It does not objectively compare theories and it does not come with value-free policy prescriptions supported by a consensus of professional opinion. Instead, we should make students aware of the value-judgments in conventional (micro)economic courses and expose them also to other schools of thought. As Dani Rodrik explains: “one's skill as an economist depends on the ability to pick and choose the right model for the situation”

Bottom Line: Mainstream introductory (micro)economic courses are not critical enough, as they often influence students to accept mainstream (neoclassical) economics, while if studied critically, we would find that mainstream economics is not very useful for students to understand real-world phenomena. Instead, adding more pluralism in economic teaching will encourage intellectually richer debates and more critical thinking.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

** Actually, Chapter 14 does, but we haven't arrived tehre yet -- David