Two heterodox economists respond to an article I blogged about last week, Hip Heterodoxy, published in the Nation, written by Chris Hayes.

Challenging Orthodox Economics – Part I | TPMCafe by Thomas Palley

Economics Outside the Mainstream | TPMCafe by David Ruccio

As our year winds down and we begin getting our materials and lessons in order for our next batch of AP Econ students, it’s unlikely we’ll pause to ask a rather important question: “Is the economics I’m teaching my students the correct and immutable truth?”

After all, isn’t economics still a young science? It’s only been a few generations since Smith, Riccardo and Locke laid the groundwork for what has become the mainstream, neo-classical/neo-Keynesian theory that makes up every major economics text and principles course out there. Who’s to say that in another one hundred years these views, products of the late 20th century themselves, will still be considered the correct solutions for dealing with the economic problem?

As mentioned in a previous post “Keynesian vs. Neo-classical Economics – and what is Heterodox Economics?”, the field loosely described as “heterodox economics” raises difficult questions of human behavior and thinking that challenges the neo-classical view of perfectly rational actors and the efficiency and perfectibility of free markets (the view that we teach in AP Economics). David Ruccio, econ professor at Notre Dame, laments on mainstream economists:

All reasonable arguments are accepted in the marketplace of ideas. Except they (mainstream economists) never read any heterodox economics, and have no idea how the hegemony of their favorite theory shuts out all other ideas…That’s the situation that heterodox economists are trying to change. By using economic theories other than those of the mainstream… By forming journals and associations apart from those of the mainstream (in which their ideas never get aired). And by challenging the mainstream conception of the discipline itself
(including its notions of what science is, and what it means to “think like an economist”).

We do heterodox economics, or what some refer to as political economy—as against economics (which, as Chris correctly argues, has become identified with a tiny number of theoretical approaches). We write about rates of exploitation and the role of power in increasing inequality and the existence of patriarchy and structural racism. Not only do we want to argue that economic actors are sometimes irrational or guided by norms and values; some of us also want to analyze economic institutions and events without even starting from individual actors. Or efficiency. Or constrained optimization.

So, do you feel guilty yet about teaching only the mainstream view in your course? Don’t fret, even Professor Ruccio has to teach his students the neo-classical approach; here’s how he deals with the status quo in his courses:

In all honesty, I mostly prefer not to read maintream economics these days. Either it says nothing of interest, or it gets me very angry. But I teach it, and I teach it in a way that is more rigorous than my mainstream colleagues. Because I teach its basic assumptions (and not as a kind of common sense) and because I present alternative views, heterodox economics. And then I read and do heterodox economics, independently of the mainstream. Because if we spend all our time worrying about mainstream economics, attempting to do mainstream economics (with a tweak here and a changed assumption there), we’ll never get around to developing alternatives.

Professor Ruccio makes an important point here. Before students can become agents of positive change, aware and capable of making the world a better place (and the field of economics a better science) they must first know what needs fixing. I know as much as any AP Econ teacher how rushed this course is, how little time is really left for discussions beyond the basic principles in the syllabus; but in the future, I think I’ll challenge myself and my students to take a little time and find out what alternative approaches to the economic problem are being researched, published, and put into action out there. Technology, the web, blogs: these are the tools that will enable us to easily connect our students to alternative, heterodox economics despite the hectic pace of our AP course. And if your school has access to online journal databases, here’s a few suggestions for economics publications that give a voice to heterodox economists like Professor Ruccio:

The Review of Income and Wealth, the Cambridge Journal of Economics, the European Journal of Comparative Economics, Research in Economic History, Industrial and Corporate Change, CES Ifo Economic Studies, the Eastern Economic Journal, the BNL Quarterly Review and The Economist’s Voice.

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Design That Solves Problems for the World’s Poor – New York Times

It is a luxury right now to sit back and peruse articles about economic topics that interest me. Economic development has been a passion of mine yet I have not had the opportunity to share my passion about economic development with my current AP students. The AP syllabus does not cover this topic and the Lorenz curve is about the closest that my AP student came to learning about income distribution and poverty. This was not an authentic study of or discussion about effective economic development.

So, I was pleased to read the article by Donald McNeil in today’s (5/29/07) New York Times which highlighted a show at the Cooper –Hewitt Design Museum where designers displayed the products that designed to serve the needs of the world’s poor. These products were created to enhance the quality of life of poor people world wide. They were designed as products that would assist the world’s poorest people in climbing the “self sufficiency” economic ladder.

“A billion customers in the world,” Dr. Paul Polak told a crowd of inventors recently, “are waiting for a $2 pair of eyeglasses, a $10 solar lantern and a $100 house.” The world’s cleverest designers, said Dr. Polak, a former psychiatrist who now runs an organization helping poor farmers become entrepreneurs, cater to the globe’s richest 10 percent, creating items like wine labels, couture and Maseratis. “We need a revolution to reverse that silly ratio,” he said.

The designers created new ways to transport water, created human powered water pumps to enable planting during the dry seasons, and designed an apparatus to clean water for drinking as you sip it directly from streams, rivers and lakes. So many inventors spend so much time designing goods and services for the rich that if in this ‘new revolution” were to take hold, the world’s poor might just find ways to make themselves richer.

What I like about this approach to economic development is that it involves giving the poorest members of our world community the tools that they will need to become independent entrepreneurs who will build their own economic success. This is not a “give them some food to eat”, “give them a dam that they don’t need” or a give them some “charity” type of economic development. It is much more than that…The artists and inventors themselves knew that:

“Interestingly, most of the designers who spoke at the opening of the exhibition spurned the idea of charity.

“The No. 1 need that poor people have is a way to make more cash,” said Martin Fisher, an engineer who founded KickStart, an organization that says it has helped 230,000 people escape poverty. It sells human-powered pumps costing $35 to $95.

Pumping water can help a farmer grow grain in the dry season, when it fetches triple the normal price. Dr. Fisher described customers who had skipped meals for weeks to buy a pump and then earned $1,000 the next year selling vegetables.

“Most of the world’s poor are subsistence farmers, so they need a business model that lets them make money in three to six months, which is one growing season,” he said. KickStart accepts grants to support its advertising and find networks of sellers supplied with spare parts, for example”

Now that is the kind of economic development revolution that I want to be part of. For more information about a truly successful worldwide economic development program for woman, check out the Grameen Bank and/or the Grameen Foundation. Both programs combine the power of microfinance, technology and innovative solutions to defeat global poverty. They too put tools in the hands of poor women. The Founder, Muhammad Yunus just won the 2006 Nobel Peace Prize for his work and for his foundation. His work inspires me..

Hello future AP Economics students,

As the school year comes to a close, I thought I’d send a short message to introduce myself and the other AP Econ teacher, Ms. Close (who many of you have had this year). We’re looking forward to a great year of econ next year; we think you will all find this class very interesting, exciting at times, and challenging always. If you do not know me or Ms. Close, please take a moment before school ends next week and introduce yourself, so we can put a face to your name!

As you likely know, AP Economics is a challenging course; it’s actually TWO challenging courses: one semester of Microeconomics and one of Macroeconomics. In fact, you will be sitting for not one but two AP exams in economics next May. To help prepare you for the first week of class, Ms. Close and I are asking you do complete a couple of simple tasks over the summer. No, we’re not giving you chapter from a text, and no you won’t be given a quiz on the first day of class; rather, we want to get an idea of what you already know about economics, and we want you to begin thinking like an economist before the first day of school next year.

Here’s your first assignment:

• Follow this link to your class Wiki, and complete the assignment as described on the page.
• Follow this link to your class Wiki, and read the course description and have a look at the course syllabuses for Micro and Macro.
• Finally, follow this link to Welker’s Wikinomics Blog and have a look at some of the articles posted this year, which will give you an idea of what kinds of things you’ll learn in AP Econ. If you feel confident, post some comments to articles that look interesting to you; feel free to share your opinions, ideas or thoughts about the topics covered. This is where we are going, by next spring you will understand almost everything posted at this site!

If you really want to impress me or Ms. Close, visit a bookstore or Amazon.com this summer and pick up one of the following titles. These are books about Econ written for someone who doesn’t know much about Econ. These are fun, entertaining, and very interesting books that demonstrate how economics can be used to understand the world around us.

Finally, have a great summer and do not hesitate to contact Mr. Welker or Ms. Close with any questions! welkerjason@yahoo.com and michelle.close@saschina.org. -Mr. W

• The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor–and Why You Can Never Buy a Decent Used Car! by Tim Harford. The newest and one of the best in the field, but with hardly any macro content
• Armchair Economist: Economics & Everyday Life . by Steven E. Landsburg. Unforgettably and deliberately provocative and counter-intuitive. Includes macro content, but often too divergent from our received AP curriculum
• Hidden Order: The Economics of Everyday Life by David D. Friedman. The rather similar precursor to “Armchair,” written by Landsburg’s friend (and Milton’s son) David Friedman, using examples that he borrowed from Gary Becker had have been borrowed from them both by the other authors in this group
• Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner. The best-selling crowd-pleaser that has really very little to do with our subject, except for some creative examples of how econometrics can be used to answer interesting questions
• The World Is Flat [Updated and Expanded]: A Brief History of the Twenty-first Century by Thomas L. Friedman. The best-selling update to “The Lexus and the Olive Tree,” chronicling the rapid and profound changes that technology has wrought on the world economy since the 1990s. There is no more important book for understanding how our lives are changing around us
• The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade by Pietra Rivoli. Not as interesting as it promises, but it illuminates a lot of economic history and issues of trade, interdependence, Asian development, and downsizing/outsourcing
• Confessions of an Economic Hit Man by John Perkins. I haven’t read it, and it seems to be very loosely connected to our course–except for one word of the title–but other teachers do assign it and recommend it, so here it is on their recommendation
• Nickel and Dimed: On (Not) Getting By in America. by Barbara Ehrenreich. Not my favorite, but often assigned in high-SES schools to alert students to the poverty they don’t know

Kudos to Economan at Squidoo.com for the book list!

NOTE: You may wonder why I’ve got so much time to blog these days. Well, first of all I’m at an international school and have only about 83 students between my grade 9 Asian History, two AP Econs and one IB Econ, so I’ve caught up with all my grading for the semester. This may be my last post in a few days, however, since tomorrow and Thursday my 38 remaining students sit for their final exams which means, I’m guessing, about 10 hours of grading before next week. For now, however, I have a nice class-free day ahead of me, so away I blog!

As my list of other AP Economics teachers’ blogs grows, I continue to hear from teachers around the US and the world who are enthusiastic about integrating this tool into their courses. This is great! If econ professors are out there blogging for the world to read, imparting their knowledge and analysis of events to those interested, why shouldn’t we be doing the same, connecting world events to the often drab details of the AP Economics syllabus, adding relevancy and urgency to what we teach?! Anyway, I heard from another teacher today, Dave Prudente of Delaney HS in Maryland. He’s just joined the blogosphere, starting his own AP Econ blog. Dave sent me the following email, which got me thinking more about how I intend to make this site a useful part of my course next year:

Dear Mr. Welker,
It’s a pleasure to hear from you and it was quite a surprise. Ironically, I’ve just started my blog because I saw your blog last week. I’ve wanted to do something like this for a while but have had little time to even contemplate it. I would appreciate it if you would link my blog to your site and I would like to do the same for your site (with your approval).

I would also love to hear about your experience using the blog this year. I’m trying to figure out how to integrate a blog with my classes next year. My problem is that I have five sections with about 145 students. I’m not sure I can keep up with administrating the site if my students really use it. Knowing my students, they’ll flood me with comments…which I suppose is the goal.

In addition, I have to complement you on your site. It’s like a central repository for all the econ material I’ve used and found on the Internet…great job Would love to hear back from you.

Best Regards,
Dave Prudente
Dulaney High School

I replied to Dave with some of the ideas I had for how to use this blog next year, and thought I might as well publish the email here since these ideas might be useful for other teachers out there who stumble upon this blog and are thinking of creating their own blogs for Econ class

Hi Dave,

I’ve also been brainstormng the optimal way to integrate the blog into class next year. The other day I found the Aplia Econ blog (http://econblog.aplia.com/). While this is actually written by employees of Thompson Publishing, who produce the Aplia program, I do like the format of it, to some extent. It is mostly made up of links to articles relating to the content being covered in the econ course, followed by analysis by the author of the post. This is basically what I’ve tried to do this semester, but what the Aplia blog does in addition is include “discussion questions” which I have not up to this point done. Perhaps the “discussion questions” are a good way to start a comment string among students.

When I read other economists’ blogs, like Mankiw’s and others, readers get their own discussions going through comments. This is what I envision my students doing. It happened a few times this semester, on some posts back in April and early May, but the blog was still new and I had not built it into my teaching yet, which is my goal next year.

So, how do we keep track of who’s contributing? Like you said, with 145 students that sound like a full time job. A science teacher at my school who’s used blogs for a while had a good suggestion. Each week you assign one person from each class to go onto the blog and record the names of everyone who’s contributed a comment for that week (or unit if week is too often). Students whose names are not on the list given to you will not receive their “comment credit” for that week or unit. I thought this was a great idea of delegating responsibility among students, and took it to another level by creating a page on my class wiki where every week the student who’s job it is to monitor the blog can tabulate the contributions from that week. Check it out here: http://welkerswikinomics.wetpaint.com/page/Blog+Contributors

In a way I’m jealous that you have so many students to get involved with the blog. I’ll have around 30 myself, and my colleague Michelle will have another 30 or so, so we’ll have a total of 60 kids reading and commenting on the blog next year. In a way, the more the better, because more diverse views and opinions will be expressed. Man, how do you grade 135 econ tests, though? Don’t envy you there!

Anyway, I’m glad you find my blog useful. Every time I find another good blog or website I think can benefit my students (or other econ teachers) I post a link to the blog. I figure the more useful the site is, the more students will use it. Oh by the way, I have created “categories” into which I place each post I make. My goal is that by the end of next semester there will be a category for every section of the AP syllabus, so at any point I can tell students to go on the blog and comment on a post about “externalities” or “current account” or any other section from the syllabus. They can click on that category and find all the posts I’ve made that relate to that section of the syllabus and post their comments! Pretty cool!

Well I’ve already posted a link to your blog on my own under “AP Econ blogs” and would be honored if you’d do the same for mine! Again, the more connected teachers and students are to others around the world, the better! Keep in touch as you develop your blog, and hopefully we’ll all find ways to make this a useful part of our programs in the future!

Best of luck, Jason Welker

I am wondering how other teachers envision the use of blogs in their Econ courses. If you have any ideas or suggestions, please post your comments here!

Scientific American: The Traveler’s Dilemma

A student sent me the above article. It’s late, and tomorrow I only have one class, so I think I’ll have to tackle this one in the morning! I can already tell this is going to be a good one to use in AP when we study Game Theory, dominant strategy and Nash Equilibrium. Can’t wait to read it!

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Since I began blogging a few months ago, I’ve discovered that the blogosphere is full of teacher like me who are using this medium to communicate and connect with their students, each other, and the world beyond their classrooms! Several of the teachers who created the sites below I have been in touch with and notified that I’d be adding their link to my page.

I would love to create a forum through which high school Econ teachers could collaborate, communicate and share teaching ideas and resources with one another (besides the AP Econ listserve, which tends to be dominated by a small minority of very vocal and strong opinioned teachers who prefer to use it as a forum for voicing their own narrow views about the American economy). I’m thinking an AP Econ teacher Wiki. I’ve had a great experience with my class wiki, and can’t wait to have my students working on that from day one next fall. In the last couple of weeks I’ve found that I’m not alone, that there are many many Econ teachers in the world venturing into the blogosphere to broaden their students’ learning. If you’re one of these teachers, let’s try to figure out how we can harness the web in new ways to strengthen what we’re doing in our classes! Here’s I’ve found so far:

• AP Economics by Mr. Prudente for AP Econ students at Dulaney High School
• AP Macroeconomics- Orange High School. Lakewood, OH The Orange High School AP Macroeconomics blog — A forum that will provide you with various thoughts and comments related to the science of economics.
• Bonaconomics – East Hampton HS, NY For students of Economics at East Hapton HS
• Mikeroeconomics – Muscatine HS, Iowa This blog is for my application of economics to everyday topics.
• ORH AP Macroeconomics the AP Macroeconomics Blog for Mr. Rodriguez at Otay Ranch High School.
• Surrounded by Economics for AP Econ students at Linoln International School in Buenes Aires, Argentina
• The Circular Flow – Powell Center for Economic Literacy The Circular Flow is my take on world events and an attempt to get people to apply an “Economic Way of Thinking” to the news of the day.
• The World of AP Econ Fort Atkinson High School AP Microeconomics blog – a place where we can be together and talk about the higher learning of economics…well, actually a way to get discussion outside of class or answer questions that we may not have time for.
• Walker Economics Blog – The Walker School, Georgia A blog for my AP Economics class to discuss economics-related current issues and news.

NCEE | EconomicsAmerica® | National Standards

A CRITIQUE OF “STANDARDS OF ECONOMICS” from the URPE

What is Heterodox Economics? Perhaps it’s easier to start by saying what it is NOT. Heterodox Economics is NOT what we teach in Advanced Placement Economics. It is not what most major universities and colleges teach in their undergraduate and graduate economics courses. It is not widely accepted as a mainstream view in the field of professional economics. Its economists are not widely published in the top five economic journals. It is not neo-classical in its views that “humans are rational, utility-maximizing agents with fixed preferences, that they make decisions “at the margins” and that the mechanisms of supply and demand (operating free of government interference) will lead to a general equilibrium whereby resources are allocated efficiently.” In other words, heterodox economics challenges the widely accepted view that free markets and free individuals acting in their own self interest will perfectly allocate resources and achieve a general equilibrium where resources are put to their most efficient uses and goods and services are distributed efficiently among individuals in society. Markets are imperfect, and human institutions should offer Adam Smith’s “invisible hand” a helping hand when it comes to allocation of resources and output.

The National Council for Economics Education (NCEE, which publishes the widely used workbook “Advanced Placement Economics”) released in 2000 its National Standards on Economic Education, based on the “essential principles of economics”. High school economics courses, including AP, are rooted in these standards, which themselves are rooted in neo-classical theory originating with Adam Smith and carrying on to Milton Friedman and today’s mainstream economists whose work receives the most acclaim in top economic journals.

On the other end of the spectrum from the NCEE is the Union for Radical Political Economics (URPE), originally founded in the 1960’s by heterodox economics with the following goals:

First, to promote a new interdisciplinary approach to political economy which
includes also relevant themes from political science, sociology and social psychology.
Secondly, to develop new courses and research areas which reflect the urgencies of the day
and a new value premise. Such areas include the economics of the ghetto, poverty,
imperialism, interest groups, and the military-industry complex. And thirdly, political
economics should be sensitive to the needs of the social movements of our day, and have
more group research, with an approach that links all issues to a broad framework of
analysis.

To better understand the differences between heterodox economics and mainstream, neo-classical economics, it may help to examine the heterodox critique of the NCEE’s 20 Standards on Economic Education. The links above will take you to the full critique, but here’s a short excerpt that I think illustrates rather clearly the differing philosophies of these two modern schools of economic thought. The NCEE standards are in bold, the URPE’s critique is italicized:

1 and 2. Resources are limited so people cannot have all they want.
This is the traditional “starting point” of neo-classical economics which focuses our attention on how to allocate scare resources. The focus is on efficiency, which is understood to mean maximizing total production. Thus the central question is how to CHOOSE – how to trade-off one thing for another. Classical economists, such as Adam Smith, looked not only at total production but at how it was distributed between classes (landlords, capitalists and workers), and Marx viewed the appropriation of surplus production (over and above what was necessary for working people) as “theft” by the ruling classes. A total “disinterest” in distribution is one of the defining characteristics of neoclassical economics. An alternative focus for economics would be how to insure a decent standard of living for the people of the world..

3. People choose different methods of allocation of goods and services.
Note throughout the use of terms such as “people” and “individuals” with no distinction between capitalists and workers. Thus “people” choose their economic systems. The assumption here is that the “choice” is merely a matter of the level at which government decisions are made rather than any disagreement about a system which relies on profit-making as the motive force behind the private provision of goods and services, Thus the “command economy” (which is implicitly identified with communism) is presented as one in which the market plays no role, and there is absolutely no mention of the communists’ abolition of the capitalism class, and subsequent end to distribution on the basis of ownership of property.

4 and 5. People respond to incentives and voluntary exchange is beneficial.
There is not reference here to the starting point of this “voluntary exchange. The poverty-stricken will take starvation wages and even sell themselves or their children into slavery – this is, of course, “voluntary” in one sense but a more comprehensive approach recognizes that “they have no choice.”

The list goes on. It’s very interesting to compare the reasonable critique offered by heterodox economists to the “truths” of economics that we teach in our principles courses. It also frustrates me that in our limited time in the AP course we are unable to further explore these alternative, yet very valid and important approaches to understanding economic behavior and policy. I will encourage my students to seek courses in university that challenge the neo-classical view taught in AP Economics. The field of heterodox economic, while it has not yet achieved mainstream status, surely will play a crucial role in the evolution of this science in the decades to come, as social unrest, political turmoil, conflict, scarcity, environmental and social ills continue to plague our ever-changing world.

While adherents of heterodoxy may not yet be widely accepted in the mainstream field, their “human” approach to the “economic problem” will surely gain appeal as growth continues to broaden the divide between rich and poor, haves and have nots, urban and rural. Bright young students who have been exposed first hand to the challenges and downsides of economic growth (such as those faced by the millions o poor migrant workers here in Shanghai) are just the kind of students who can go on to make valuable contributions to heterodox economics.

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Hip Heterodoxy

I just found a link to this long and interesting article about a fledgling field called “heterodox” economics. Heterodox is defined as “not in accordance with established or accepted doctrines or opinions, esp. in theology; unorthodox.”

In the case of heterodox economists, what they don’t believe is the
neoclassical model that anchors the economics profession. Classical
economics refers to the theories laid out by Adam Smith and David
Ricardo in the eighteenth and nineteenth centuries, which emphasized
the power of the “invisible hand” of the market to promote the division
of labor and economic growth. Smith famously summed up the recipe for
prosperity as “peace, easy taxes, and a tolerable administration of
justice,” with “all the rest being brought about by the natural course
of things.”

There’s a lot to digest in this five page article from the Nation. I think I’ll have to blog it in a few separate posts. This will also be a great article for use in my AP Econ course when we compare the neo-classical version of the vertical Aggregate Supply to the Keynesian horizontal AS curve, and the implications therein regarding use of monetary and fiscal policies to achieve macroeconomic stability.

One line that jumps out at me right now is:

Indeed, the cradle for much of our policy discussions can be found in
the first chapter of just about any introductory economics textbook,
where the basic precepts of the neoclassical framework are described
under the rubric of “thinking like an economist.”

Again, I continue to come across evidence that an education in Economics is absolutely crucial to understanding important issues in all realms of society today. As I continue digesting this important analysis and history of competing economic ideologies, I will continue to think about how to use this in my class next fall, and blog any ideas that come to mind. If you have the time and interest, give this article a read and post your comments here!

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Greg Mankiw’s Blog: Colleges vs Universities

A couple of days ago I had a conversation with one of my graduating seniors about whether or not she’d major in Economics at Wellesley next year. She wanted to know more about the department, so we went online, looked at the research being done by the professors, looked into their academic and professional backgrounds, and tried to get an idea of the caliber of the department there. I blogged about our conversation here. This morning I found this old post by Greg Mankiw recounting a conversation he had with former senator George McGovern about the difference between Harvard and Wellesley.

Here’s Mankiw’s advice:

The most important choice a high-school senior faces when choosing
where to be an undergrad is between research-oriented universities and
teaching-oriented colleges. If you go to a place like Harvard,
Princeton, or Yale, you get a famous faculty. But the first priority of
that faculty is their own research and writing (and blogging!?), and
they are more likely to shower attention on grad students than
undergrads. If you go to a place like Amherst, Swarthmore, or Williams,
you get a faculty whose first priority is undergraduate teaching. But
you do not have a menu of graduate courses to sample from, and you do
not have as vibrant a research atmosphere to experience. It is a tough
choice.

I’ve had this exact conversation with my AP and IB students who seek advice about where to go for college. I think Mankiw sums up my own views about the differences between large universities and smaller liberal arts colleges nicely. Personally, perhaps speaking as a teacher myself, I think the most important aspect for undergrads to consider is their access to professors, class sizes, and quality of teaching. Save the big name universities with famous faculties for graduate school, when you’ll get the attention you deserve.

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Environmental Economics: Teaching economics

University of Rhode Island Econ professor Stephen Swallow explains why basic economics should be taught:

I am not suggesting Econ 101 is wrong. It may need better teaching, more sensitive to the rising relevance of certain limitations in the basic principles …. But if understood clearly, I think the basic principles are powerful, positive (as in constructive) tools for making society better off. If there is a concern about equity, that concern should be dealt with via an explicit policy rather than attacking economics as irrelevant or wrong — basic principles indicate an efficient society may be better able to afford to address equity (that is, a more efficient economy, whatever the wealth distribution, has more to go around – even if through express, coercive wealth transfers). Some of those decisions are in the realm of politicians, and are not the responsibility of economics (although economics has long understood the implications of efficiency for being conditional on a distribution of wealth – which is often another area of misplaced accusation from demonizers).

If Econ 101 was wrong, it would not actually be taught (at least not as a science course). Helping students understand the principles is our duty. Our delivery may be imperfect, but there remains a socially valuable foundation. Telling students that economics is all wrong and always harmful – and, as is often done, pushing for moral rhetoric as a proposed approach – this, I believe, is harmful to society and the environment and misleads students. The better students may eventually figure out the logical consistency and limitations of good economic analysis, but this may only be after significant time – and lost productivity – getting stuck in what can be a cult of demonizers.

It would be most productive to help improve upon particular analyses and basic approaches, rather than just shooting the entire profession and (often) leaving students not only confused but also empty handed. Lots of sound empirical evidence suggests that moral rhetoric falls short on the masses, particularly when incentives and budget constraints bind. We need to fix imperfections rather than sling mud.

… it seems to me that demonizers of economics often are minimally as guilty of oversimplification as they claim economists to be. It remains for each of us to decide for ourselves where we fit into the balance of constructive research and teaching.

Thanks to John Whitehead at Environmental Economics blog

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Wu: Large yuan rise would hurt China — Shanghai Daily | 上海日报

China’s Vice Premier Wu Yi defends China’s currency controls in Washington:

The yuan’s value isn’t the cause of the deficit, Wu said yesterday at a
dinner in Washington attended by US Treasury Secretary Henry Paulson
and Federal Reserve Chairman Ben S. Bernanke.

About 85 percent of China’s surplus with the US is from foreign companies
exporting products no longer made in the United States, such as shoes,
she added.

So, America’s trade deficit is not because of a historically weak Yuan, rather because America imports shoes made in China. VP Wu should look more closely at her audience; she’s preaching to the choir with Paulson and Bernanke in attendance; and I doubt they’re swallowing what she’s dishing up. Of COURSE the trade deficit is because America imports “products no longer made in the United States”. But why do they do this? Uhm, could it be because of the historically weak Yuan? Looks like VP Wu could use a refresher in her principles of Macro course.

Now the US is threatening new trade barriers if the Chinese do not allow the Yuan to appreciate more on foreign exchange markets.

“Large scale yuan appreciation will have a negative impact on China’s
economy,” Wu said, adding that trade protection would hurt relations
between the US and China.

China’s increasing of the yuan’s flexibility may slow growth and cut into profits in Chinese firms. However, new barriers to trade with its largest trading partner will do the same. China’s liberalization of industry should now be accompanied by a similar liberalization of financial markets. A more balanced current account will allow China’s economy to begin growing at a more sustainable rate and help to allow China’s middle class access to the quality goods they demand from abroad.

Most importantly, American teachers in China will have access to more affordable breakfast cereal and quality coffee, which at current exchange rates cost more than I like to think about.

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Months ago I made a deal with my 35 AP Econ students. I vowed that at the end of the year, if they had decided that they would study economics in college, they would be rewarded with a small prize from Mr. Welker. My original intention was to get copies of my favorite “everyday” economics books and give a copy to everyone who intended to major in Econ in college, but then realized I would not have anyway of knowing how many students that would be. So, when I was in Bangkok a month ago, I picked up six copies (two each) of three of my favorite “fun” econ reads: Freakonomics, The Undercover Economist and Confessions of an Economic Hit Man.

As of this afternoon, eight students indicated their intention to major in Economics, so eight names went into the hat, and six came out. I’m proud to announce the winners:

• Heidi Chai and Chris Park won because they attended our Saturday review session before the AP Exams and were entered in a drawing there.
• Will Moeller (who will be returning to Michigan for his senior year next year) is the proud owner of Freakonomics.
• Vincent Lin (attending Johns Hopkins), Chris Eldred (Wharton Business School) and Helen Wu (Wellesley College) were the last three whose names came out of the hat. They’ll be given their books tomorrow at graduation!

Congratulations to you all. It’s been a great year and you’ll be missed! I hope you continue to enjoy your econ studies in college, and I hope you will keep in touch with your AP teacher in the great years ahead! -Mr. W

BBC NEWS | Talk about Newsnight | “Gis a McJob”

“An unstimulating low-paid job with few prospects, especially one created by the expansion of the service sector”.

That’s how the Oxford English Dictionary defines “McJob”. Yesterday McDonald’s launched a petition to change the definition, saying that the above definition is derogatory and hurtful to McDonald’s employees.

I heard a blurb about this story on BBC tonight and it got me thinking about a previous post I wrote about the stronger Chinese currency’s impact on the balance of trade between China and the US: Will a weaker dollar affect the balance of trade? It already has!. Elaine Witkowski, a teacher in North Carolina commented on this post:

“Few people mention that the jobs being created are lower paying jobs with less benefits than the manufacturing jobs that are going overseas. I teach in a rural county in NC where only 1 out of 8 people have a college education. When textile, furniture and other manufacturing jobs go away, these workers with a high school education or less do not find equivalent jobs. While going back to school to get new skills seems to be a solution, the reality of having money to pay for tuition and finding time while working many jobs and taking care of your children is slim. I know parents working two to three jobs and we have a food bank at our school for when times get rough for families. I believe the zero sum concept is alive for workers without the necessary skills to get better employment when the factories leave.”

In other words, globalization, outsourcing and off-shoring of traditional manufacturing jobs has left Americans in communities like Elaine’s with little left to choose from but McJobs.

Another thought that crossed my mind: What would most McDonald’s employees say about the work they do? My guess is, most probably would describe their jobs flipping burgers and scooping fries in a way similar to Oxford’s definition above.

If McDonald’s succeeds in removing “McJob” from the dictionary, what will be next? Where will the Orwellian restructure of our language stop? Will they go for McMansion next? If so, my students living across the street in Forest Manor may need a new word to describe their houses!

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Andrew Leonard of Salon.com writes an interesting piece about the implications of a bicycle friendly future on the global economy.

A bicycle built for a better world – Salon.com

People who know me know that I’m a bike guy. Here in China I own five bicycles. This may sound crazy, but allow me to explain: One is only for riding the 400 meters between school and home, this is my city bike (it’s name is Genghis). One is strictly for off-road, cross-country and downhill mountain biking, one is for strictly on-road, fast-paced, long distance riding while one is for touring (on or off road), and the last, my personal favorite, is not for riding at all, it’s only for looking at: that’s my Shanghai Yong Jiu bicycle, better known as the Forever.

So what do bikes have to do with economics? John Burke, president of Trek bicycles, made famous by Lance Armstrong who rode a Trek to six Tour de France victories, believes that that the future is bright for the bicycle industry:

“Looking at a United States plagued by obesity, traffic congestion,
urbanization and environmental woes, he sees “an incredible
opportunity” to sell bicycles.”

Growth of the bicycle industry may seem a simple, more localized alternative to the incredibly complex global automobile industry. In fact, the bike industry today is nearly as complicated in its global integration as that of automobiles. Leonard writes:

“A bicycle made in Taiwan by Giant or Trek or Specialized is an integral cog of the global economy, even when it is being ridden by a hippie in Berkeley pulling a Burley trailer full of locally grown organic produce behind him. You may help reduce U.S. dependence on foreign oil by riding a bike, but you’re a long way from opting out of the world-annihilating industrial megacomplex. Bikes are high-tech products manufactured according to the latest advances in metallurgical and plastics sciences in robot-run factories connected to globe-spanning supply chains and taking advantage of the differentials in labor costs between the developed and developing world. There’s nothing at all simple about the role Taiwan plays in the world economy, or how modern manufacturing processes enable precision machined parts from scores of countries to be assembled together and delivered to a bike store near you. I’m all for a more bike-friendly world, where every road has a bike lane (or at least a wide shoulder) and every city goes the extra mile to welcome bikers with open arms. But let’s not pretend that there’s something simple, or bucolic, about what we’re doing. It’s darn complicated and only getting more so.”

While I agree with Leonard that most of the bikes being ridden by Americans come from factories in Taiwan with components from China, Japan, and other Asian countries, I have to make an argument that growth of the bike industry presents more opportunities for entrepreneurs, craftsmen, and community stakeholders at home than continued growth of the automobile industry ever could.

I personally own two bikes that were built in the United States, one which was built in a welding shop in my tiny hometown in Idaho by a guy named Toby. How many people know the name of the guy who built their car? In fact, as cycling increases in popularity across the US, thousands of individuals who are passionate about the art of bicycle design and construction have tapped the growing market for tailor made, custom bicycles. Several of these garage-based welding operations have grown into large, economically competitive firms producing thousands of bikes each year for domestic buyers and for the export market (Cannondale, Titus, Seven Cycles, Moots, and many others).

While a world of Trek riders may not fit the Utopian image of local, home-grown, hippy, organic society Leonard imagines, more demand for bikes does mean greater opportunity for the re-emergence of an industry that with the growth of the auto industry over the last thirty years has slowly disappeared from America’s economy; that is, locally designed and hand-crafted vehicles for transporting people and products within and between communities.

By the way, If you doubt the utility of bikes for transporting products, visit Shanghai sometime, where bikes are used for FAR more than just recreation!

Bikes hand-made in the US of A:

Custom Bicycle Builder Portal: Listing over 40 builders
North American Hand Made Bicycle Show 2007

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High corn price mean pigs eat candy bars, french fries

Oh, the life of a pig… Due to the rising price of corn (thanks to increased production of corn ethanol), farmers all over America are substituting relatively cheap junk food to keep their porkies plump!

“Besides trail mix, pigs and cattle are downing cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut-butter cups. Some farmers mix chocolate powder with cereal and feed it to baby pigs,” writes Lauren Etter.

My wife calls that last one “puppy chow” when she makes it! It’s mmm… good!

“California farmers are feeding farm animals grape-skins from vineyards and lemon-pulp from citrus groves. Cattle ranchers in spud-rich Idaho are buying truckloads of uncooked french fries, Tater Tots and hash browns.”

Mom’s, don’t let your kids read this article, you’ll never hear the end of it: “But MOOOMMM, even FARMERS let their animals eat french fries, peanut butter cups and licorice for dinner, why can’t you let ME??!!”

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Molly Saso, AP Econ teacher at the International School of the Sacred Heart in Tokyo, asked in an email to the AP Econ email list about Free Response Question #2 from the International exam (form B). The question reads:

2. (a) Assume that businesses are granted a tax credit on spending for machinery. Using a correctly labeled graph of the loanable funds market, show the effect of the business sector’s response on the real interest rate.

Here’s Molly’s email:

“The loanable funds market, in spite of its apparent simplicity, continues to throw up some ambiguities–or perhaps it’s just me who is perplexed.

What would be the impact on the market of a tax credit for spending on machinery? (Q2 on Form B, 2007–all the FRQs are already on AP Central.)

While the intent is indeed to increase planned investment, would firms increase or decrease their demand for loanable funds? To the extent that the tax credit means that there is a greater amount of post-tax profits available for investment, then the demand for loanable funds could decrease; but wouldn’t many firms need to supplement their post-tax profits with a greater demand for loanable funds?

Perhaps, if the impact on demand is indeterminate, the shift would be in supply, since firms would have a greater store of “savings” (retained profits). However, since a shift in supply was the answer to the second part of Q2, I somehow doubt that the examininer would be expecting a supply shift in part (a) as well.

The trouble is that the question asked for no explanation–only a graph to “show the effect”. I wonder what kind of shift was expected?

In perplexity,
Molly”

Molly’s question is a good one, and although I hadn’t spent much time reflecting on this question, her email got me thinking more about this interesting and challenging question. Here’s what I came up with and replied to Molly with. I don’t know if it’s correct or not, but I’d be interested to hear what others thought about this question:

Hi Molly,I’m in Shanghai, so my students also took form B (the international questions). I too found this to be a bit confusing. But as I teach my students, “don’t make the questions more complicated than they have to be, look for the most obvious answer.” Unfortunately, this one had no immediately obvious answer, as you explain below. I think what made it difficult was the term “tax credit on spending for machinery”. I don’t know about you, but this specific term never came up in my class!

Here’s how the question begins: “Assume that businesses are granted a tax credit on spending for machinery”. I interpret this tax credit as an amount deducted from federal income tax, calculated as a fixed percentage of expenditures on, in this case, machinery. In other words, the tax credit is not granted unless the firm undertake investments in new machinery. Your suggestion that the tax credit results in a “greater amount of post-tax profits available for investment” may be mistaking the credit indicated with a reduction in corporate profit taxes. I think if this were a corporate profit tax question then perhaps demand for loanable funds would go down since new investment could come from the now higher profit margins firms receive; in fact, the tax credit is not granted until new investment is undertaken by the firms in the first place.

I would explain this to my students by saying that essentially, the expected rate of return on investments goes up (since fewer taxes will be paid once new machinery is bought), shifting the Investment Demand curve out, thus the Demand for loanable funds, increasing the real interest rate.

That said, I cannot be certain that this is what the AP was looking for, so don’t hold me to it! Writing this email allowed me to really clear this one up, though, so thanks for the inquiry!

Jason

Anyone else have a better answer or something to add?

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Bloomberg.com: Calendar, Abacus Help Determine Size of Chinese Rate Increases

Here’s an interesting piece about Monetary Policy in China.

“The People’s Bank of China today raised its one-year benchmark lending rate by 0.18 percentage point and its one-year deposit rate by 0.27 percentage point. Why 18 or 27 basis points instead of the increments of 25 used by most other central banks?

The answer has to do with the Chinese calendar and superstition, as well as the ancient Asian counting device, the abacus.”

While “traditional” Chinese culture may seem to disappear with globalization, the superstitions of old are alive and well in the financial community:

“`Rates divisible by nine avoid rounding of interest and allow easier calculation by abacus,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.

In addition, the number nine in Chinese shares a pronunciation with the word “longevity” and has long been considered a lucky number. Chinese wedding feasts have nine dishes; Beijing’s Forbidden City has 9,999 rooms.

`The number nine is very important in the Chinese society and business world,’ said Chan Mansing, associate professor at the School of Chinese at the University of Hong Kong. `Nine stands for longevity, abundance and masculinity. It also represents the highest attainable level in all human endeavors in the Book of Change, a Chinese philosophy book that has been read for thousands of years.’ “

Hey, who knew?!

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Gas hits record high price for eighth straight day – May. 20, 2007

According to CNN.com:

“The run-up in prices is a big concern for store chains, according to the retailers’ trade group. Its survey of consumers released early Friday found the average consumer believes that the price of gas will reach $3.32 per gallon by Father’s Day… As a result, 40.2 percent of consumers are taking fewer shopping trips, while 37.9 percent told the survey they plan to shop closer to home.”

“To offset the effects of higher prices, more consumers are giving their wallets a little extra cushion by cutting back on discretionary spending or choosing to frequent retailers closer to home.”"

And this is a bad thing? To big chain stores, perhaps, but what about the neighborhood businesses (are there still any of those?) that will benefit after years of losing business to big box retailers like Wal-Mart and Home Depot? Consumers driving less may harm major retailers whose stores tend to be clumped together in mega shopping strips on the outskirts of towns, but surely the benefits of less driving outweigh the costs.

Fewer cars on the road mean less traffic, less noise, more space for cyclists, less hazard to pedestrians and children playing ball in their yards, cleaner air and a deceleration of global warming, more customers at neighborhood businesses, and perhaps even more quality time with family and friends (if we can assume less time shopping means more time with each other).

So if high gas prices result in so many improvements in our environment, relationships, communities and health, why are they such a bad thing? Perhaps because higher gas prices overburden the poor. Since fuel makes up a larger proportion of a poor family’s budget than a rich one’s, higher gas prices put a bigger dent in the disposable incomes of the poor than the rich. Economic theory would indicate that the poor’s demand for gas is more elastic than the rich’s, meaning that price increases are met with a greater decrease in consumption than someone for whom gas makes up a relatively small part of their overall budget. This, again, may not be so bad. Perhaps the poor will begin limiting their outings to those that are deemed most necessary (such as to and from work, school, child care or clinic) and cut back on unnecessary trips (such as to mall, the movie theater, the go cart track or the Wal-Mart across town). Less consumption may not lower overall standard of living when we consider that much of the consumption going on by Americans (rich and poor alike) is frivolous and ostentatious.

Even acknowledging the regressive nature of the burden of high gas prices, it still seems to me that higher prices are necessary to achieving a cleaner, healthier, better functioning society. The problem is, if prices are kept artificially high through price gouging, as the Democratic leadership in Congress seems to believe, then the full benefits of higher gas prices are being passed on to oil companies rather than society, as could be achieved with an effective gas tax.

CNN presents their own solution to the problem of high gas prices:

From higher taxes to more drilling, ways to cut gas prices – May. 10, 2007

1- Pass a carbon tax
2- Increase efficiency
3- Push alternatives
4- Require oil companies to make more gas
5- Build a gasoline reserve
6- Drill more oil

It’s too bad my AP class has finished for the year. I think a great quiz would be to hand them this list and ask, “What’s missing?” Anyone who’s completed a semester in a Principle of Microeconomics course should be able to get an A on such a quiz. Can you tell what’s missing? If so, please post your comment here. (Hint- fill in the blank: Supply and ______?_______)

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The College Board released the Free Response Questions given to AP Econ students around the world on May 17 over the weekend. The links below should lead to the PDF files, but a user name for AP Central may be required to view them.

AP Free Response Questions for International Students:

• Macro
• Micro

And for American Students:

• Macro
• Micro

Upon first glance, I have to say both sets of questions were a bit harder than those from past years. First off, the long FRQs (number 1) in Macroeconomics tested a topic from a relatively minor section of the syllabus: Trade. Almost every past long FRQ from Macro started with a scenario where the economy was experiencing instability (recession or inflation), followed by a scenario where Fiscal or Monetary policy (or both) were used to correct the instability. This year’s question on both the international and the American exams asked nothing about correcting instability, rather focused on relative price levels in two countries, and how this would affect the balance of trade, output abroad, and self-correction from a recession at home (i.e. no government involvement). The last part of the international question 1 was tricky:

(d) Although recovering, Australia remains in recession and its government takes no action. Indicate whether each of the following curves will shift to the left, shift to the right, or remain unchanged in the long run in Australia.
(i) Aggregate supply
(ii) Aggregate demand

I think what the exam writers were looking for here is an explanation that Aggregate Supply will shift outward do to the flexibility of wages in the long-run. As the recession continues, high levels of unemployment will mean workers are willing to accept lower wages, which means lower resource costs for firms, and an outward shift in AS. This question breaks from the norm on AP FRQs, which as stated above usually involve the use of some corrective measures taken by government or a central bank to restore stability.

Questions 2 and 3 on the international Macro test covered more traditional topics, specifically: loanable funds market, real interest rate and investment (#2) and relative interest rates between two countries, flow of financial capital, exchange rates and net exports (#3). I am confident most of my students were prepared for these questions.

The Microeconomics FRQs were no less surprising in the topics covered and their difficultly. The long FRQ (number 1) covered monopolistic competition; while past long FRQs have covered this, a far more common focus has been pure competition or pure monopoly. In reality, a question on monopolistic competition seems appropriate given that it is a more realistic market condition; “pure” anything really only exists in theory, so this is no real shocker.

Question 2 on the international exam dealt with Game Theory and oligopoly. Fortunately, I has suspected this would appear on the exam and had focused much of my review on payoff matrixes, including an appendix in my Micro review guide dedicated to this topic. My students should have nailed this one.

Question 3 in Micro caught everyone off guard, as it was a True/False question. I hadn’t seen one of these on and AP exam since way back, somewhere in the mid-90’s. Granted, the question did ask for an explanation of why each was true or false. Still, one of them seemed particularly confusing for my students, many of whom have come to debate the correct answer with me:

(c) If a firm shuts down in the short run, its profits will equal zero. True/False. Explain

The logical answer seems to be TRUE, obviously a firm would not be shutting down if it were earning any profits (normal or economic). But what my students were unsure about was whether the AP expected an answer of FALSE, followed by an explanation such as: “A firm will shut down when it experiences a loss greater than its fixed costs, in which case its profits will be negative”. In this case, it’s profits will NOT equal zero, rather they will be negative. Anyone have a clarification on this one for us? What would YOU have answered?

Overall I thought the 2007 Free Response Questions were a bit more challenging than those from past years. Mostly this is because of the absence of any questions involving the use of Fiscal or Monetary Policies, which in the past have been quite prominent themes. One clear message I have taken away from this year’s exam is that Trade, Exchange Rates, Relative interest rates, and net exports seem to be taking center stage for the AP in the Macro area. I would not be surprised if in the next couple of years, these international topics become more of a focus in the Macro course. In the latest edition of the Acorn book (the official AP publication outlining the Econ courses) International Economics only consists of 10-15% of the syllabus. Don’t be surprised if in the next edition of this publication International Economics makes up a much bigger chunk. In my opinion (writing from an international school in China), this is a very good step forward for the Advanced Placement Economics course!

xkcd – A webcomic of romance, sarcasm, math, and language – By Randall Munroe

Okay, so maybe economics falls short of a “perfect universal truth”.

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