The Econocracy: a review

The debate about the state of economics has long been in danger of falling into a mutual accusation of fallacy-mongering. Critics of the mainstream are accused of attacking straw men, whilst defenders sometimes stray dangerously towards the “no true Scotsman” fallacy: “ah yes, but that’s not proper economics." The Econocracy by Joe Earle, Cahal Moran and Zach Ward-Perkins should elevate this debate.

They argue that “economics has become dominated by a particular, narrow way of thinking about the economy” and that “Economics education involves memorizing and regurgitating neoclassical economic theory uncritically.”

They back up their claim by a survey of economics courses at some leading universities which I find truly depressing. The emphasis that courses place upon fact-free theory suggests that teaching hasn’t caught up with the “credibility revolution” (pdf) which places more weight upon facts. And the “problem sets”  Earle, Moran and Ward-Perkins reproduce have me agreeing with Martin Wolf, that I wouldn’t become an economist today: they look more like teaching dogs to jump through hoops than a proper education.

Their call for a true liberal education which prizes critical thinking over rote-learning is laudable.

This poses the question: why did economics education change so much from the 70s and 80s, when pluralism was prized? The answer lies not just with economics but with the university system. Earle, Moran and Ward-Perkins describe how increased pressure to publish caused university departments to value orthodox neoclassical economists who better appeal to journal editors: for all its virtues, peer review can also promote groupthink. And they show that increasing student numbers and a desire to cut costs squeezes out critical thinking in favour of abominations such as multiple choice tests.

All this is good. For me, though, the book raises some questions.

One is: how radical must be the changes in economics education? Earle, Moran and Ward-Perkins call for teaching to “start with empirical evidence and real world issues and then introduce theory afterwards.” This sounds admirable. But it’s difficult to implement.

For example, some important basic facts in macroeconomics are that: there’s no such thing as a “representative firm” (see this great paper (pdf) by Nick Bloom and colleagues); that GDP growth in developed nations is often stable but interrupted by occasional crises; and that recessions are unpredictable. The sort of theory that can account for these facts is very tricky. A shift away from equilibrium theories towards complexity, evolutionary models and agent-based modelling would require massive changes for which students and perhaps academics are ill-prepared.

A second question is: do the authors let off the media too lightly? They say:

In an econocracy political decisions are redefined as technical questions to be answered by experts and thus removed from the public arena…The vast majority of citizens face the struggle of making informed democratic choices in a language they have never been taught.

This overstates things: the EU plebiscite was a big and regrettable counter-example. But insofar as it is true, whose fault is it? Even if economists were truly knowledgeable humble experts, their voices would not prevail against a media which is largely hostile or indifferent to the truth.

Much as I sympathize with the authors’ critique of economics (at least as it is taught) I fear that it is not just economists that are the problem. Some of our fundamental institutions – universities and the media – are perhaps failing to sustain an open society. And this even more dangerous than the flaws in economics.

Comments

[Magnus]

I haven't read the book, but one immediate reaction is: Econocracy? What Econocracy?

There's been precious little economically-informed policy for over 6 years. Economics, well, certainly economic policy, hasn't been left to the economists, it's being driven by ideologues.

On economics undergrad curricula, I would imagine they have a bit of a case, but equally would imagine that related complaints can be made of other social sciences and beyond. Certainly the UK education system as a whole is obsessed by measurement, which inevitably ends up with excessive emphasis on hoop-jumping, with critical thinking very sadly neglected.

[Luis Enrique]

"orthodox neoclassical economists who better appeal to journal editors"

Thats rather question begging. There are hundreds of journals, need to ask why high status ones favour what they do and what confers status.

Also, plenty of orthodox courses do start with empirical evidence. It's quite common for first few macro lectures or growth lectures to start with 'stylised facts' - so for example when teaching the money multiplier the first thing we'd do is get students to obtain data and graph time series of M0/M4 ratio, the stylised fact there being it's all over the shop. Hard to have too many silly ideas about money multiplier after seeing that.

In my experience of teaching perfectly mainstream macro courses we regularly stopped throughout course to look at data or to cover empirical work, often to show how the theory we'd just learnt did not fit certain facts and to motivate next thing which tried to address that shortcoming. This would not be evident from looking at some of the problem sets we set. I taught macro to all years, the first made frequent reference to basic economic facts, the second moved back and forth between theory and empirical work that directly spoke to the theory just covered, and then the third was much more essay based and tackled contemporary economics problems - that was where we taught students about bank balance sheets, and shadow banking, for example.

Things conventionally educated economists do know about are sampling error and publication bias. I haven't read the book but based on your précis I am not sure it presents an accurate picture, at least not based on how they did things at Bristol. Perhaps Bristol was not representative, but if not, nobody there was aware of it.

[GregvP]

One change that would have to be made is the rehabilitation of the labour theory of value.

Pick 1,000 products at random from MIT's Billion Price Index, and determine the labour content of each commodity. Run the resulting data pairs through any stats software, and you'll get an r-squared over 0.8. Economists consider 0.3 to be convincing evidence for a theory.

[GregvP]

... the point being: starting with actual evidence would mean a complete overhaul of the discipline (not least: doing away with 'stylized facts', Luis).

Inserting all the caveats and preconditions required for the basic theory to hold true would mean teaching the fragility of the conventional theory to preconditions.

Teaching the reality would be a great course in critical thinking and in the fragility of policy in the real world. An excellent thing to to in a 101 course.

That probably has more value than teaching a bunch of equilibria as though they were both inevitable and desirable.

[Luis Enrique]

a stylised fact is just a summary of the 'actual evidence' e.g. "investment is more volatile than consumption"

[Metatone]

Thoughts:

1) Economic policy of today is set on the basis of undergraduate teaching half-remembered by civil servants and economists from their own time in university of the 1980s. Double that distortion for the media who report on it.

2) The media influence on policy is huge. Fixing that is probably the big issue in terms of the public realm. (As opposed to the academic one.)

3) As someone who has taught students myself, I have to highlight that what students absorb tends not to be conditioned only by the teaching. Like Luis I've put a lot of effort into bringing facts into the international trade module I teach - yet it's clear that the economics students who take the class take away very different lessons than (eg) the dual econ-mgmt majors. (Yes, I teach in an American context.) The mathematical culture of economics means the average econ. student is an algorithmic thinker, who prefers clean theories to messy reality. This tends to be reinforced by the texts in use. Few courses (including my own) can get agreement from departments to radically step away from teaching methods and texts that reinforces this problem.

3a) Thus, to agree with Chris, changing some of this is a huge effort, which few are ready for. I've tried as an individual to do what I can, but it's certainly beyond individuals - changes in attitudes across depts, esp. the top of depts, are very important.

3b) If you're interested in the exceptions, it's quite possible to come out of economics well educated and able to think beyond over-simplified theories. Luis, Chris and plenty of others signify that. But what's key is that the setup doesn't help the majority of graduating economists in that way. In the UK, many of the interesting thinkers go back into teaching economics, but the culture of texts and equations means they have not changed the teaching as much as they might.

[torff]

For the past couple of semesters, I've been teaching this free e-book to my student. It's an interesting and largely successful attempt to deal with the issues raised by the book under review. At the very least, it's infinitely better than Mankiw or Krugman or the other standards. Here's the link:

http://www.core-econ.org/

[reason]

Interestingly "the strawman" and "the no true Scotsman" fallacy are diametric opposites (both involve setting up stereotypes - one uses the stereotype to represent a whole class, and the other uses the stereotype as a model for all to be compared to).

[reason]

"A shift away from equilibrium theories towards complexity, evolutionary models and agent-based modelling would require massive changes for which students and perhaps academics are ill-prepared."
Wow! It so happens that I think that is at least part of the way we have to go. It is not clear from what you wrote whether you think that too or not. To me, economics in order to progress has to look outside of itself towards meteorology and ecology as sources of inspiration (in fact I think economics is a SUBSET of ecology - human ecology).

[reason]

(P.S. An ecology that ignores births and deaths and natural resources is a very odd sort of ecology don't you think?)

[TheEconocracy]

Thanks for this review, Chris.

You raise the question of whether we 'let the media off the hook'. It is undoubtedly true that whatever ills exist in our society cannot solely be blamed on economics, and it would be absurd to argue otherwise. We can only agree with your call for the media and universities to do more to sustain an open society (and we do call for the latter). But hey, it's a book about economics!

In the book we tend to focus on technocratic institutions like central banks, competition policy, and the spectrum auctions over more contentious political debates such as fiscal austerity vs stimulus. We do this (a) to draw attention to these areas, which are still massively important (and have been since the crisis) but relatively underscrutinised and (b) to avoid being pigeonholed into contemporary partisan divides.

We are aware people like Simon-Wren Lewis and yourself have been arguing that the stimulus debate ignores the views of economists, and while we sympathise we think this can be overstated – fiscal stimulus remains a contentious issue among economists, at least in the public realm. It is worth remembering George Osborne’s direct references to the Reinhart-Rogoff 90% threshold to justify austerity (at least before the whole Excel debacle).

You also argue that the theory which accounts for basic facts in economics can be pretty complicated. But in many ways this is part of the problem – it is as if economists are not willing to say anything if it isn’t backed up by some complicated model. One can easily introduce students to the basic ideas in theories without making them go through the derivations, something our lecturer Devrim Yilmaz did in his Bubbles, Panics and Crashes evening module at Manchester.

Luis Enrique:

Bristol is not included in our sample because, like most universities, they were cagey with their curriculum. We would welcome a more comprehensive review of economics curricula across the country, including lecture notes if possible, but most universities were just not willing to give anything to us. It is perhaps interesting that Bristol is one of the few major universities where no student group has emerged, so perhaps you are right that it is better.

You say “[the content of your courses] would not be evident from looking at some of the problem sets we set.” This isn’t what we did – we looked at course outlines and final exams to find out what was taught and whether passing required critical thinking and knowledge of empirical evidence. The answer was a firm ‘no’ on both of those counts.

It is also important to note that all 3 of the authors, as well as virtually everybody in the student movement to reform economics, have experienced an economics education first hand. If we did not think our gathered data (and our interpretation thereof) accurately represented our own experiences, we would have at least acknowledged and discussed it in the book.

Finally, you mention stylised facts. We actually discuss the use of stylised facts in the book:

“Where facts are presented in economics classes, they are often ‘stylised facts’ – general, widely accepted pieces of evidence about economics – and the answers can even be found in the lecture notes. While better than nothing, stylised facts are simply insufficient to give students a critical perspective on models, since by their nature they are broad and could be consistent with any number of models; one example of a ‘stylised fact’ about the labour market might be that unemployment rises in recessions. Students do not build an in-depth knowledge of real-world economics but instead glean only a superficial understanding of the world while devoting most of their time to abstract models.”

PS the money multiplier was taught to me unambiguously and directly in 3rd year, so again I think Bristol is probably unrepresentative in this regard.

Sorry for the long comment!

[TheEconocracy]

Whoops, one more: torff, we do mention CORE in the book. While undoubtedly an improvement, it doesn't address the majority of our critique adequately. For example, it remains firmly within the bounds of neoclassical economics and there is little evidence of critical thinking.