Making Economics Relevant

This post was written by Carmelo Ferlito.  He is a senior fellow at the Institute for Democracy and Economic Affairs (IDEAS)


I taught economics in Malaysia for seven years. My students were mainly second and third year university students who attended my economics classes (microeconomic theory and policy and history of economic thought) after having already learnt the basic notions of macro and microeconomics.

Most of my students were double majoring in economics and finance. My impression is that, in general, they could see the relevance of finance in their daily lives (it can help in making or saving money) while they struggled to get enthusiastic about economics, which instead was perceived as a set of abstract graphs and formulas, somehow alien from real people’s lives.

Students’ cold relationship with the subject goes hand in hand with the growing disillusionment with the discipline that followed the global financial crisis in 2007 and the apparent inability of economists to see it coming and to deal with it afterwards.

I cannot deny that when I was a student, I was caught in the same trap. While it was not difficult to grasp the general meaning of the basic economics concepts, the development of the discipline appeared to me to be unrealistic, too abstract and, therefore, useless for understanding reality and not interesting enough to build a career on. This is probably one of the reasons why I chose economic history and the history of economic thought as the subjects for my postgraduate studies, rather than economics itself.

A turning point in my scepticism toward the discipline was when I read The Economics of Time and Ignorance by Mario J Rizzo and Gerald O’Driscoll. The book did not reduce my scepticism about economics as it was taught in class, quite the contrary. But the authors showed me that a different economics is possible, with regard to both the contents and to the way it is presented.

The lessons I learnt from Time and Ignorance, together with a deepening of the knowledge of the history of economics, helped me to relativise and contextualise the contents taught during the traditional economics courses. I realised that economics is not simply an evolving discipline, it is subject to a non-linear evolution and different streams of thought coexist like karst river patterns.

The two key words on which I would rebuild the teaching of economics, with the aim of making it relevant and fascinating for students, are realism and pluralism. Realism means, first of all, to help students to understand how economics can say something about most of the aspects of human life, for example, to woo a girl or boy and the patterns of traffic jams can both be explained by sound economics. This does not mean to renounce abstraction, but to choose that level of abstraction that is functional, a powerful explanation of reality rather than the one that tries to subjugate reality to its unrealistic assumptions.

Pluralism in also key. It is important to realise that textbook economics is not the only one. Economics is a rich discipline and to know that a variety of economic schools is not simply a heritage of the past but a living reality is important to confront our own need for an explanation with a variety of paradigms at our disposal. The discipline is not a monolith. An unsatisfactory textbook explanation or assumption does not mean the absolute nonexistence of more satisfactory ones. Students need to be introduced to different paradigms, to be trained to look for contending explanations and to develop a judgment about them.

What went wrong with economics, therefore, is not simply economics itself, but a certain way to develop and present textbook economics. The main flaws of such development are its unrealistic assumptions (for example, to ignore the role of time or the absence of a dynamic explanation for entrepreneurship) and its pretence of being a monolithic truth.

A growing interest in reforming economics education is emerging and I believe that a sound reform needs to be grounded in realism and pluralism, in order to make economics relevant again, interesting, stimulating and vibrant for future generations of scholars.


Here is the link of the op-ed:

  1. I read this with interest, as I too struggled with the relevance of economics for quite some time after graduate school, when I graduated in 1981 from the University of Pennsylvania. I taught it for a while, then completely gave up on it in 1992. It was not until I realized the urgency of climate change, and the suicidal policy of unlimited economic growth, that I changed my mind. And it was the discovery of Ecological Economics that helped to bring me back to believing in the potential of economics to be relevant and helpful for our climate emergency. I wish there were more discussion of Ecological Economics, and the need to economists to get politically involved, in these forums.
    Rick Casey
    Fort Collins, Colorado

    • Dear Professor Casey, many thanks for your comment.
      Indeed, what has been called (Peter Boettke, David Prychitko, Steve Horwitz…) “the economic way of thinking” can help us understanding and interpreting many of real world issues. To properly reason as an economist, as explained in the economic way of thinking, offer a good lens on the world.
      Mainstream economics is not the only available lens.

  2. Ken Zimmerman said:

    It seems you and many other students in economics need a much broader and interdisciplinary education before encountering economics. Or, at least simultaneously. I was lucky in having what was then called a “classical” education. Lots of balance and being taught a respect for all areas of education as best considered mutually enhancing. The goal was a well educated person. Not a specialist or expert. Most people today are so concerned with getting a job with a decent salary, they miss out on education. And end up dunce experts. Sad. And dangerous for any society. If you don’t understand and stand for the culture in which your life exists, you’re easy prey for indoctrination into just about anything.

    • Dear Zimmerman,
      I could not agree more. I strongly agree that what you call “classical” education will help training better economists. I was lucky in studying in Italy, where, though I went through technical education, history, literature, geography and so on had a very relevant space in the curriculum.

      Best Regards

      Carmelo Ferlito.

  3. Yoshinori Shiozawa said:

    Philosophical reflections on economics do not help us much. We should consider “the contents and to the way it is presented” (Carmelo Ferlito) for undergraduate students. What can we teach in the courses depends much on the policy of the faculty, but each teachers have some degree of freedom. We should use this freedom to a full extent.

    Here is my proposal for a rough description of the syllabus for a new economics teaching (at the similar level of Economics 101) for first 15 lectures.

    1. Prices and exchanges between two parties
    2. Modern industrial production and the constancy of direct costs
    3. Firms set their product prices by the full-cost principle
    4. Competition among producers (and sellers) and the markup rates
    5. Production of commodities by means of commodities
    6. Price system for an economy as a whole
    7. Budget constraint and others (e.g. time constraint) for consumers
    8. Firms produce as much as their products sell at the predetermined prices
    9. Profit of the firm and the main constraint when it wants to increase its profit
    10. Choice of production techniques and the minimal price theorem
    11. Why prices are stable unless the set of techniques changes
    12. How the total amount of employment is determined (principle of effective demand)
    13. Irrelevance of standard theory of consumers and the non-existence of demand functions
    14. Irrelevance of standard theory of producers and the non-existence of supply functions
    15. Irrelevance of standard theory of competitive equilibrium

    If you have more time to teach, you may mention topics as follows:

    – Why do firms expend large money for sales promotion?
    – Real wage rises when new production techniques are added
    – How the international wage differences are determined
    – How to promote productivity in a firm and a nation

    These topics may compose more developed courses after the first course for beginners.

    If you have any inquiries, please post your questions. You can see the theories at the back of this proposition in the following papers (a chapter of a book and a whole book):

    (1) The revival of classical theory of values

    (2) Microfoundations of Evolutionary Economics

    The link to (2) is the Preface of the book. For the total contents of the book, please also read comments to this page. If you want to examine these papers to create your new syllabus, I am happy to share the above papers with you.

  4. Yoshinori Shiozawa said:

    The main difference between the standard and proposed syllabus is that the latter does not adopt equilibrium framework i.e. it does not explain that the price and the quantity of a products are determined at the crossing point of demand and supply curves. Crossing lines (or curves) of demand and supply began in Marshall’s Principles of Economics (Fig. 19 which appears in the footnote in page p.288, Eight Edition, 1920)

    This formulation required many inconvenient assumptions. First of all, it was necessary to define demand and supply functions. The supply function was defined as the marginal cost function at any given point of production. Marshall identified this cost curve with the supply price curves. Supply prices are defined as “prices which dealers are willing to accept for different amounts” (p.280) of demand. This formulation is already fatally wrong because there is no such supply prices. In most cases in the modern industrial economy, the producers are willing to produces as much as their products are demanded at the prices set by them. If they can sell their products more than now, they will be happy to do so at the same price.

    In order to define supply prices, it was necessary that firms face decreasing returns to scale. This is evidently unreal because in most cases firms face increasing returns to scale. For example, cost accounting normally assumes that a fixed variable cost and a variable cost that is proportional to the produced quantity. This standard case is evidently increasing returns to scale as the average cost is equal to c + F/x, where c is the coefficient of the proportional cost, F the fixed cost and x the volume of production.

    To cover up this apparently unreal assumption, Marshall introduced the concept of internal and external economy and explained that there is no internal economies in side a firm and only external economies are observed for industries when firms concentrate in a specific region. Other favorite phenomenon that many teachers want to show students is the law of diminishing marginal returns when the inputs are substituted (or when one input is fixed). Diminishing marginal returns and decreasing returns to scale are two completely different mechanisms but most often teachers successfully confuse their students.

    There are many other inconveniences but I skip those points.

    My proposal of the new syllabus is to throw away all these wrong formulas except adding at the last phase of the course brief explanations on why the standard formulas are wrong.

  5. Yoshinori Shiozawa said:

    I wonder if Maria Alejandra Madi is satisfied with the discussion developed in the RWER blog page:

    There are now more than 31 comments but there are few proposals or arguments to change economics lecture courses. Almost all answers are abstract methodology arguments which do not help much in creating a new economics course that can replace actual economics 101.

    Is this really the situation that Real-World Economics Review wants to build up?

  6. The Center for Market Education (CME) in Malaysia is trying to give a little contribution by publishing a new series, called EduPapers, in which some introductory topics in economics will be discussed in a alternative way and made accessible by non specialists. We just finished working on the first paper, authored by me, titled “Economics: Human Action and Its Meaning”. If interested, I will share the link once available.

    • Yoshinori Shiozawa said:

      Great idea! I will try to send you an e-mail.

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