Notes on a Real World Economics Curriculum

This paper has been included in the publication
“The Economics Curriculum: Towards a radical reformulation”

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Abstract

I propose a fairly root and branch reform of the curriculum. But it is not meant to be a detailed manifesto. For example, the core model of agent behaviour in mainstream economics should still be taught. It is not completely irrelevant to the real world. But it should be just one of a number of ways in which agents behave rather than the way. International trade theory, for example, particularly in its latest Sraffa-Ricardo guise, has much to recommend it. The literature on cross-sectional econometrics inspired by Heckman is important, in ways which become readily apparent when confronted with a great deal of the statistical analysis of such data carried out in the other social sciences.

Inevitably, quite a lot of things from the standard curriculum would have to give. But the main reforms which I would make are in summary:

  • Teaching macro through the perspective of important episodes in economic history
  • Teaching the use of modern simulation software which enables behaviour out of equilibrium to be explored
  • Teaching alternative models of agent decision making, which again can be examined using simulation
  • Teaching network theory, and using this to relax the assumptions that agents operate independently with fixed tastes and preferences

1 response

  • Ormerod’s insightful Notes have elicited some thoughts and I want to share them with the audience of this conference as well as with Ormerod himself. They refer specifically to two areas.
    1. The paper contains several remarks which are the usual preserve of philosophy of science. They can be summarized in the following: ‘is the model reality?’; ‘what are the limits of theory, any theory?’; ‘when are assumptions reasonable and legitimate’? How do the assumption built-in into statistical and econometric theory affect our interpretation of results’? This reinforces my long-held view that economics students would greatly benefit from a simple course in Philosophy of Science with emphasis on economics. It would help the students keep a critical mind on what we teach; focus on changes in the development, dissemination and acceptability of theories and how these processes may be related to economic history.
    2. Another important point raised by the paper is the assumption of independence of decision making. I agree that this assumption obscures the reality of how the economic system works. Keynes was well aware of the influence of on each other’s behaviour. The herd behaviour often leads to fulfilment of expectations: if we all expect increase in the price of a stock and buy it; the price will increase. However, it is not always so. In support of the latter statement I want to consider the case of the recent financial crisis and the sub-prime mortgages. This is a case in which all banks seemed to have agreed to lend and households agreed to borrow. Lenders influenced each other and so did borrowers. Moreover, both sets of agents seemed to have been in agreement that the risk was low; of course the motivation and probably the range and quality of information available to the lenders and borrowers were different. But all parties agreed that the risk of default was low. The fact that there was widespread convergence of risk evaluation – even if based on different information and reasons – led to excess financialization and therefore to increased risk. This agreement led to higher risk of systemic failure; systemic failure is indeed what happened. None of agents took into account systemic risk, i.e. that excess financialization would lead to a collapse of the system. None considered the macro implications. It was not their job to do it. The Financial Services Authorities should have done it. My conclusion on this point 2 is that: (a) agents do influence each other; (b) the outcome of herd behaviour is not easily predictable and not always in the same direction. We should make our students aware that lack of independence in the behaviour of agents can lead to non-easily predictable, non-neat solutions and undesirable consequences.