Saturday, February 21, 2009

Restoring Economics

In a sense, no one really knows what’s going on with the economy; and even if they do, they don’t know what to do about it. But academia is partly responsible for the public mystique about the economy. In formalizing learning, academia has the unfortunate result of making some subjects overly complicated. There are no in-built checks to make topics simple; and I’ve come across many egotistical professors, who, in an attempt to exploit their power, relish in making concepts more difficult than necessary.

Yet the following class discussion with a professor, from an undergrad course on corporate finance, demonstrates how people can approach economics without that much formalized knowledge. It was quoted at the start of a book review for The Ethics of Money Production.

It was one of those rare moments when the entire class listens attentively and participates in the discussion. That it occurred with this particular class was even more instructive to me personally. This was a principles-of-finance course, required not only of finance majors, but of all students pursuing either a major or minor offered by the school of business at my institution.

While the typical principles class contains some highly motivated students who aspire to careers in finance, banking, and accounting, it is also filled with a fair number of students who look upon the course as a sort of dreaded, compulsory disruption to their nonfinance curriculum. But on this day, they were unified and engaged. A rare moment indeed!

At this point, the reader might consider this a strange way to begin a book review. The anticipated segue is provided by a voice in the back row of the classroom, where a rather quiet and normally imperceptible student began the following exchange with me:

"You know, we hear all about these bailouts and stimulus packages coming out of Washington."

"Yes, I know."

"Hundreds of billions, even trillions of dollars, right?"

"That's right."

"They don't really have the money, though, do they?"

"No, they don't."

"And so they are just going to print it, aren't they?"

"Yes, the banking system is going to print it and loan it to the government."

"Out of nothing, right?"

"That's right."

"But that's not right, is it?"

Just to be clear, the student was not suggesting that the premise was not right, as in not correct. He was asserting that this massive production of money out of thin air was not right, as in not ethical.

(from The Right & Wrong of Money Production, 2/18/2008, by Michael King)
Although not everyone might agree with the student, it doesn’t take much background knowledge to follow the discussion. We all know what he’s getting at.

In contrast though, you do need a lot of background knowledge in order to take such an economics course. Specifically, you need strong math skills and you have to be prepared to apply them. One of the first concepts you’re likely to learn is that of the production possibility curve. This is touted as a useful concept early on, because it can be used as a theoretical model to map the economy on both the macro and micro-scales. At the same time, you’re hit with such boring and dry explanations as the following (from Wikipedia)
The move from point A to point B indicates an increase in the number of computers produced, but it also indicates a decrease in the amount of food produced. Assuming that productive resources do not increase, making more computers requires that resources be redirected from making food to making computers. If production is efficient, FA of food and CA of computers could be made (as Point A shows), or FB of food and CB of computers could be made (as Point B shows).
In reference to figures like these

This is just the start of the long and arduous journey that the undergrad takes to complete his intro to economics. Is it any wonder then that the public at large seems to be grossly ignorant about economics? After all, if they didn’t take one of these boring courses, they most likely heard horror stories from peers who did.

The frustrating part is that, as the above dialogue demonstrates, economics doesn’t have to be boring. We all deal with money, prices, and incentives. Add a little guided thought on top of that, and it’s not hard to teach economics in a wholly engaging manner. Thomas Sowell accomplished this in his book, Basic Economics.

Sowell can be divisive and you might disagree with him on points, but all he asks of the reader is a hint of interest into current events and he’ll get you thinking about the wider economic role of actions like banking, risk-taking, measuring the macroeconomy, and investment. He uses everyday news articles, along with common sense, to build upon the reader’s intuitive understanding of economics.

The phrase intuitive understanding economics may seem a little odd. After all, what’s intuitive about the something like the production probably plot? Very little, and that’s why it doesn’t belong at the front of an introductory course. But insofar as everyone engages in the marketplace, intuition - not math - is a rather suitable place to start.

You’ll often hear the argument that education is an integral aspect of a democracy; and without it, our citizens can’t make informed decisions when they go to the polls. Nonetheless, those who subscribe to such notions tend to be more liberal, and it shows in their quality of education. In high school you’re more likely to learn about FDR’s New Deal than the Federal Reserve; and in college, economics is presented as a dismal mathematics model while courses in political science are more welcoming and palatable.

Part of this, I suspect, is because universities err on making things overly complicated and verbose. If mathematics can possibly be integrated into a major, then it absolutely will. The university has nothing to lose by erring on too many courses and prerequisites. And when there are a plethora of potentially interested students, this can be a way to weed some of them out.

Insofar as public education has a social obligation to produce informed citizens (and maybe it doesn't, but this is presumably why it exists), it's partly to blame for the public’s current ignorance about the economy. Few citizens can readily grasp the importance of banks and the Federal Reserve to the economy. This has a two-fold effect: It shrouds economics in a veil of unnecessary complexity hidden to the public's scrutiny; and it allows public policy experts take advantage of this ignorance. Such a rapidly growing ignorance can even be considered dangerous in the same sense that many would consider an ignorance of politics dangerous.

The Washington Post, for instance, just had an editorial which urged consumers to spend rather than save their hard-earned money. The author tries to guilt-trip the reader into spending based on the presumption that saving money would cost the economy some 53,000 jobs. It doesn’t take very sophisticated knowledge about economics to see the fallacy in that one – namely, that you can’t have a sound economy when each individual household is living beyond their means. But without such knowledge, what do you say to the family that sympathized with the author’s points, and spent their way into years of debt in order to help the American economy? And then encouraged their neighbors to do the same? Afterall, the author does sound pretty convincing when he writes:
Borrow and spend, borrow and spend is what got us into this mess. Apparently, borrow and spend will get us out of it.
He then goes so far as to encourage individuals to glue together their torn up credit cards. I couldn’t believe what I was reading! Even if you subscribe to the (Keyensian) view that spending on consumer goods fuels the economy, what good would come from spending on increasing interest from credit card debt?

Although I’ve never been a fan of public education, economics is an area in which it has utterly failed. And for this the nation has suffered.


Media (in order of appearance):

Photo: (1) Production possibility curve; (2) Sleepy, 06/13/2008, by Barbcalie; (3) Grocery cart, 11/30/2007, by Buxmama; (4) Federal Reserve Building, 05/20/2006, by Dystopos; (5) NYC National Debt Clock, 06/24/2006, by WallyG.

Video: (1) Stimulus: Because all economies have performance issues., 02/04/2009, Reason TV.
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