Archive for May, 2007

May 28 2007

More on Heterodox Economics

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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May 27 2007

Keynesian vs. Neo-classical Economics – and what is Heterodox Economics?

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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May 27 2007

Mankiw on the undergraduate experience

Published by under Education,Teaching

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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May 25 2007

Why basic economics should be taught

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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May 25 2007

China’s Vice Premier talks basic economics

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.75 RMB in Shanghai

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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