Gabriel Makhlouf, Secretary to the Treasury (New Zealand), gave a very thoughtful presentation at the Government Economics Network Annual Conference in Wellington. The main focus of his talk was the relevance of economics and economics teaching. He recalled his early days studying economics at University when Lipsey was the textbook of the day and stagflation and the ascendency of Friedman over Keynes were the talking points.
He quite rightly criticises the reliance on mathematical models in decision-making and he suggests that problems arise when the straightforward models,designed to think in a structured way about the economic issues, are confused with the reality we are trying to address. That risks confusing a moral science for a natural one.
Although we can build economic models based on rational consumers with perfect knowledge there is a need to accommodate unintended events which are part of the imperfect market. As Paul Krugman put it, “economists, of all people, should have been on guard for the fallacy of misplaced concreteness” and “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth”.
He quotes Arthur Marshall
“I have a growing feeling that a mathematical theorem dealing with economic hypothesis is very unlikely to be good economics, and I go more and more on the rules:
1. Use mathematics as a shorthand language rather than as an engine of enquiry.
2. Keep to them until you have done.
3. Translate into English.
4. Then illustrate by examples that are important to real life.
5. Burn the mathematics.
6. If you can’t succeed in 4, burn 3. This last I do often.”
Also of note is his advice to the economics profession.
* Are you covering different schools of economic thought in your teaching? Is your approach intellectually pluralistic enough?
* Are you teaching enough economic history, so that we can learn the lessons from the past?
* Do your students have enough time to absorb and reflect on the material they are learning? In fact, as the discipline expands, are your students taking enough economics?
* Are you encouraging your students to embrace and respect the perspectives that other disciplines bring to thinking about and solving economic problems? What, for example, have we learned about neuro, evolutionary and behavioural economics? And how can that learning be better incorporated into public policy-making?
* How can we better understand the trade-offs between policies that improve incomes and those that improve social inclusion or environmental sustainability or our resilience to economic shocks?
* And, perhaps most importantly, are you challenging yourselves, and your students, to think beyond the comfortable?
Having read ‘This Time is Different’ by Carmen Reinhart and Kenneth Rogoff you often wonder why economists and public officials didn’t pick the common patterns amongst so many previous financial crises
Below is a link to the full article – a good read.
Economics: Teaching, Applying, Learning
I can also recommend the book “What’s the use of Economics”, edited by Diane Coyle, which examines what economists need to bring to their jobs, and the way in which education in universities could be improved to fit graduates better for the real world.