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economics education

This is an outline of the lecture 3 in Advanced Microeconomics — expands somewhat on the slides available from the link. This should be useful to heterodox economists looking for ways to teach an alternative course, radically different from conventional approaches. First two lectures consisted of some preliminary math, and can be skipped without lack of continuity.  Video of the lecture (90m) is available at the bottom of the post.

Supply & Demand is Central to Economics: This is the modern Theory of Value. The market price determines the value – this is in conflict with classical conceptions of value.

BUT, this theory is WRONG!  The central question in theory of Value is: HOW are prices determined? Why are water and tomatoes cheap, and why are diamonds expensive?

Current answer is the Supply and Demand theory of economics. Classical economists’ answers were  Labor Theory of Value.

Modern Answers are seriously deficient. Classical Schools had substantially more insight into these questions. We will be discussing classical thinking (Adam Smith, Ricardo, Marx, Sraffa) later in the course. This lecture deals with: Failure of Supply & Demand in Labor Market. This failure was the Raison-d’etre of Keynesian Economics

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Recent active learning experiences have been associated with “flipped” or “inverted” classroom (Norman and Wills, 2015). Indeed, this method has been receiving increasing attention by professors that search for alternatives to traditional lectures so as to cover some topics of the course content.

By adopting the flipped  classroom in economics instruction, professors out to enhance a larger pre-class involvement of the students not only by reading the selected bibliography but also by watching instructional videos.

Before the class, professors provide instructional short videos (five to fifteen minutes) that cover the main ideas related to a selected topic of the syllabus. The videos generally emphasize theoretical approaches, definitions, formulas and graphs. Recent evidence shows that many professors actually record a narration of the lecture slides and notes.

As students should watch the video before the class, professors can privilege active learning methods during class time. Therefore, the class activities aim to apply the material that was covered in the videos in order to enhance a real-world approach to economics education. These activities- that are supervised and oriented by professors – can include, for instance:

  • Presentation, analysis and discussion of real-world problems
  • Team–work exercises oriented to solve practice problems followed by class-room discussion of the main results.

Indeed, internet technologies are also affecting the economics classroom. Topics in macroeconomics, microeconomics, international economics, financial economics, among others, can certainly benefit from flipped classrooms since this teaching practice does not mean the replacement of professors with videos.

 

References

Bishop, J. L., & Verleger, M. A. (2013, June). The flipped classroom: A survey of the research. In ASEE National Conference Proceedings, Atlanta, GA.

Honeycutt, B. (2013). Looking for ‘Flippable’ Moments in Your Class. Retrieved from http://www.facultyfocus.com/articles/instructional-design/looking-for-flippable-moments-in-your-class/

Norman, S, & Wills, D. (2015). Flipping your Classroom in Economics Instruction: It’s not all or nothing. Retrieved from http://faculty.washington.edu/normanse/uploads/2/9/8/5/29853431/flipping_your_classroom.pdf

Before proceeding with Re-Reading Keynes, I would like to clarify the issue of exogeneity and endogeneity, which he understands, but most of his followers failed to understand.  This is to clarify a segment of a phrase he uses in describing the four ways in which level of employment can increase within the framework of the classical theory of economics. The fourth factor listed by Keynes appears somewhat mysterious in the original text:
(d) an increase in the price of non-wage-goods compared with the price of wage-goods, associated with a shift in the expenditure of non-wage-earners from wage-goods to non-wage-goods.
== in the previous post (P9: Theory of Employment) I re-stated this as an exogenous increase in real wage, to clarify what Keynes wanted to say. However, (d) above is what Keynes actually wrote, and I want to explain why Keynes wrote in this way. This involves an excursion into the supply and demand model, and the concepts of exogeneity and endogeneity.
What Keynes is saying here is that if there is an increase in demand for luxury goods consumed by aristocrats, and an associate decrease in demand for necessities purchased by laborors, then the real wage will rise and that will increase employment. Keynes is very careful to create a scenario in which the real wage rises due to EXOGENOUS factors shift in demand by non-wage earners — the aristocrats.  What Keynes understood is something basic which is not understood by modern economists like Varian when they discuss the supply and demand model — ONE CANNOT CONTEMPLATE VARIATIONS IN AN ENDOGNEOUS VARIABLE (because endogenous variables are not free to move; they can only change if some of the exogenous variables which affect them change). This means that asking what consumers will demand if the price changes is a WRONG question — prices are endogenous and they cannot change by themselves. An increase in price cause by shortfall in supply would lead different consequencs from an increase in price caused by an upward shift in the demand. If a consumer is asked what he will do when the price changes, he should ask WHY did the price change, because his response to the price change DEPENDS on cause of the price change. He cannot provide a response to the question without learning about the cause, and whether or not this is a temporary or permanent change.

 

Comments on Varian: Intermediate Microeconomics. Chapter 1, which sets up a simple supply and demand model.

Brief Summary of Post:

These comments are about the first few pages of the chapter. Quotes from Varian are in italics. Criticisms are made in this post about the concepts of models, optimization, equilibrium, and the concept of exogeneity, as dealt with by Varian. Models are used without explicit discussion of the relationships between model and reality, which is essential to understanding how models work. For an extended discussion see my lecture on Models Versus Reality. The post explains why optimization, taken is tautological by Varian, is false as a description of consumer behavior. For an extended discussion of the conflict between axiomatic theory of consumer behavior and actual human behavior, see my one hour video: Behavioral Economics Versus Neoclassical Economic Theory.  Similarly, the decision to study only equilibrium behavior handicaps economists, making them blind to disequilibrium events like the Global Financial Crisis.

Detailed Discussion

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PRELIMINARY REMARKS: Philosopher Hilary Putnam writes in “The Collapse of the Fact/Value Distinction” that there are cases where we can easily and clearly distinguish between facts and values — the objective and the subjective. However, it is wrong to think that we can ALWAYS do so. There are many sentences, especially in economic theories, where the two are “inextricably entangled” .

This is the fourth post in a sequence about Re-Reading Keynes. This post is focused on a single point which has been mentioned,  but perhaps not sufficiently emphasized earlier: the entanglement of the economic system with the economic theories about the system. Our purpose in reading Keynes is not directly to understand Keynesian theory — that is, to assess it as an economic theory in isolation, and whether or not it is valid and useful for contemporary affairs. Rather, we want to co-understand Keynesian theory and the historical context in which it was born. This is an exercise in the application of Polanyi’s methodology, which I described in excruciating detail in my paper published in WEA journal Economic Thought recently:

Asad Zaman (2016) ‘The Methodology of Polanyi’s Great Transformation.’ Economic Thought, 5.1, pp. 44-63.

I must confess that I am not very happy with the paper; I was struggling to formulate the ideas, and could not achieve the clarity that I always try for. It is a difficult read, though it expresses very important ideas — laying out the foundations for a radical new methodology which incorporates political, social and historical elements that have been discarded in conventional methodology for economics. One of the key elements of Polanyi’s methodology is the interaction between theories and history — our history generates our experiences of the world, and this experience in understood in the light of theories we generate to try to understand this experience. This obvious fact was ignored & lost due to the positivist fallacy that facts can be understood directly by themselves. The truth is that they can only be understood within the context of a (theoretical) framework. Once we use theories to understand experience, then these theories are used to shape our responses to this experience, and so these theories directly impact on history — history is shaped by theories, and theories are shaped by history. The two are “inextricably entangled.”

A key mistake of logical positivism is the attempt to separate the objective and the subjective — an idea that we have all swallowed in the course of our education. In fact reality is shaped by a complex interaction of the two. When we taste a fruit, the flavor is determined partly by the objective characteristics of the chemicals in the fruit, but also by the characteristics of the taste buds on our tongues, and ALSO by the interpretative apparatus within our brains which interprets the stimuli coming into the brains. To reduce this complex process to the external and objective characteristics of the fruit would be a great mistake. It is this mistake which is embodied in conventional economic methodology. Economists do not understand that they are very much a part of the economic system. How the economic system operates is STRONGLY influenced by the theories propounded by economists. The economy of communist Russia was created under the influence of Marxist theories, and cannot be understood without understanding Marxist theory. The operation of the US economy is strongly influenced by the dominant economic theories. Quantitative Easing, QE, is a brainchild of Bernanke, based on Friedman’s understanding of the Great Depression. QE has strongly affected economic conditions in the USA and throughout the globe. The observer cannot be detached from the system being observed.  Just taking this one methodological insight from Polanyi on board is sufficient to completely invalidate the current methodological approach used by economists.

I have a 45 minute video lecture on “The Methodology of Polanyi’s Great Transformation” which attempts to explain these methodological ideas in a more user-friendly way. This is linked below:

aaeaaqaaaaaaaahhaaaajdq5nmzhzwvllwmxn2utndg0yy05mtg2lwe5ymqxzjhhmji0nqThe first post on Reading Keynes provided an outline of the reasons why this is a good idea. It is clear that economics is broken. We need a new macroeconomics for the 21st century, one which can solve the massive problems which humanity as a whole is facing on political, social, economic, and environmental dimensions. Keynes faced similar problems, and found solutions which guided economic policy in the mid twentieth century. It is always useful to absorb the insights of our predecessors, before trying to build upon them. Such a methodology is essential for the advancement, progress and accumulation of knowledge. Our current stock of human knowledge is based on the collected insights and labors of hundreds of thousands of scholars, accumulated over the centuries. We would return to the stone ages if we were to reject it as being full of contradictions and errors (which it is). Instead, progress occurs by absorbing the past accumulated wisdom, and trying to remove the errors, or add missing insights, building on our heritage, rather than discarding it and starting over from scratch.

Several of the central Keynesian insights into the causes of the Great Depression never made it into the economics textbooks. However, our goal in studying Keynes goes far beyond just the re-discovery of these lost Keynesian insights.   A central goal is to apply and illustrate a radically different methodology for studying economics in particular, and social science in general. This is derived from a study of The Methodology of Polanyi’s Great Transformation. This is an extremely important point, which we proceed to amplify and explain further.

1.       Problems with contemporary economic theory arise from a fundamentally flawed methodology, which is incapable of learning from real world experiences. As Romer said, macroeconomics has gone backwards for the last several decades. This is because the methodology currently in use does not lead to progress and accumulation of knowledge. Very briefly, this is because current methodology is the Axiomatic-Deductive Methodology of Greek Geometry, which was never successful in dealing with natural phenomenon. Instead, what is needed is scientific methodology as practiced and demonstrated by Ibn-ul-Haytham. Unfortunately, logical positivism created massive confusions and misunderstandings regarding scientific methodology, which persist to this day, despite the fact that logical positivism has been rejected.

2.       Why have modern economists adopted and practiced a deeply flawed methodology? This is a complex and tangled tale, but its origins lie in the Battle of the Methodologies (Methodenstreit) in the 1890’s. In this battle, the German Historical School of Schmoller, which advocated a contextual and historical approach lost to the Austrian School of Menger, which advocated a more scientific, mathematical and a-historical methodology. The details and consequences have been explained at length in “How Economics Forgot History” by Geoffrey Hodgson. As a consequence of the economists’ search for scientific laws which are universal invariants, economic theorists have invented an artificial world of maximizing robots without history, culture, institutions, and social norms.The process of economic modelling — learning to think like an economist — involves translating economic problems to this artificial world and then calculating the results. This can be done because all the robotic agents behave in predictable ways, and the environment is sterilized of all particular historical, social, environmental elements. However, most often, economic outcomes in this artificial world bear no resemblance to outcomes in the real world. Mistaking a highly distorted map for the territory, economists are confused when real world phenomena do not match the results of their models.

Some of the key methodological issues which we will try to develop in this re-reading of Keynes are highlighted below:

3.       Theories cannot be separated from their historical context. Thus Keynesian theory can only be understood within its historical context. We cannot understand Keynesian theory as a collection of principles and/or mathematical laws, taken out of context and understood to apply to all economies across time and space. When placed within it historical context, Keynes becomes much easier to understand.

4.       Even more important, theories interact with history. Human being formulate theories in order to try to understand and explain changing social circumstances. When circumstances change rapidly, theories are devised to understand the change. These theories, whether right or wrong, are used to  respond to changes, and thus end up shaping history. From this perspective, it is important to study Keynes, regardless of whether his theories were right or wrong, because economic policies from mid-twentieth century onwards were guided by his views. Thus Keynesian theories have shaped economic history. There is a complex interaction of theories and history, and we cannot understand history without theories, just as we cannot understand theories without their historical context.

5.       Because of the central importance of point 4 above, we provide a simple illustration to clarify it. As described in greater detail by Polanyi, the process of enclosures of common land deprived the masses of access to livelihood and created poverty on a large scale in England. Large numbers of authors described the problems and searched for causes of this phenomena. However, the analysis of Malthus, which blamed the problem on the excessive fertility of the poor, came to dominate. His theories deeply influenced the Poor Laws, and the British response to poverty, and thus millions of lives. Even though Malthusian theories about the arithmetic increase of food and the geometric increase of population were empirically incorrect, we must understand Malthus to understand the economic policies and circumstances of England at that time.

Accordingly to widely accepted methodological principles underlying the development of modern economics, theories are formulated without historical context. In addition, economics is studied in isolation from politics and society. We propose to study Keynesian theories within their historical context. This will substantially enrich our understanding of Keynes. In addition, the historical context includes the political, social, and economic environment, which will allow us to see that economic events cannot be studied in isolation, since all these dimensions of human lives interact with each other. Again our approach goes against a core methodological commitment of modern economics, which insists that economics can be separated from political and social circumstances and studied in isolation.

HOMEPAGE for Re-Reading Keynes. Links to more material on Methodology

I am planning a sequence of posts on re-reading Keynes, where I will try to go through the General Theory. This first post explains my motivations for re-reading Keynes. As always, my primary motive is self-education; this will force me to go through the book again — I first read it in my first year graduate course on Macroeconomics at Stanford in 1975, when our teacher Duncan Foley was having doubts about modern macro theories, and decided to go back to the original sources. At the time, I could not understand it at all, and resorted to secondary sources, mainly Leijonhufvud, to make sense of it. Secondarily, i hope to be able to summarize Keynes’ insights to make them relevant and useful to a contemporary audience. Thirdly, there are many experts, especially Paul Davidson, on this blog, who will be able to prevent me from making serious mistakes in interpretation.

Reasons for Studying Keynes

The heart has its reasons of which reason knows nothing.” Blaise Pascal

In line with the objectives of the WEA Pedagogy Blog, I am initiating a study group with the aim of [re-]reading Keynes’ classic The General Theory of Employment, Interest and Money. There are many reasons why I think this is a worthwhile enterprise. I hope to make weekly posts summarizing various aspects of the book, as we slog through the work, which can be difficult going in some parts. At the very least, this will force me to re-read Keynes, something I have been meaning to do for a long time. In this first post, I would like to explain my motivation in doing this exercise. Read More

From the 1950s onwards, the macroeconomic models of the neoclassical synthesis, based a system of simultaneous equations, focused on the interaction between the market for goods and services and the money market in the context of a general equilibrium analysis. According to John Hicks (1904-1989),  in the general case, the capitalist economy is at full employment level of output.  The underlying employment theory is based on the demand and supply of labour in a competitive market. In fact, this neoclassical approach supposes that price adjustment market mechanisms could guarantee full employment.  In same specific cases, however, the general equilibrium implied by the IS-LM model could not necessarily correspond to a full employment level of output. This situation, called unemployment equilibrium, would be the result of market imperfections, such as rigid money wages, interest-inelastic investment demand, income-inelastic money demand, among others.

In the 1960s, mainstream macroeconomic models expanded the analysis of the negative correlation  between  inflation and unemployment. This correlation was  based on the conclusions drawn from an empirical study  -the Philips curve- about the negative relationship between the evolution of the rate of employment and the rate of variation of nominal wages in England at the turn of the 20th century.  The attempt to incorporate the Phillips curve (trade-off between inflation and unemployment) in the analysis of the labour market dynamics turned out to  put emphasis on the role of nominal wages in determining prices, and ultimately, on the demands of workers that put pressure on inflation.

As a matter of fact, since the late 1960s,  the economic scenario of inflation and unemployment in the OECD countries enhanced the spread of the ideas of Milton Friedman, who proposed new monetary policy suggestions founded on the acceptance of the short run trade-off between inflation and  unemployment. After a period of expansionary monetary policy, as businessmen and workers calculate future prices and wages after considering the information they have at present, the rise in the short-run levels of inflation would be reinforced by higher inflationary expectations  and higher nominal wages and prices. For Friedman, expectations are adaptive and, in the long run, the trade-off between unemployment and inflation does not exist. In practice, the promotion of price stability could require a higher level of unemployment in the short-run. In the long-run,  unemployment would be stuck at its natural level.

The Monetarist school of economics eventually made its way into the neoliberal policies of Reagan and Thatcher and formed the core of the proposals of the economists that defend the Washington Consensus agenda. Since these economists have been much more concerned with the effects of inflation on the economy, the economic policy recommendations that priviledge the inflation targeting takes for granted the existence of a natural level of unemployment, the so called non-accelerating inflation rate of unemployment (NAIRU).