Falling enrolments in mainstream economics programs is a desirable outcome

If you have had the misfortune to study economics formally at university then you will recall sitting through endless and tedious lectures where the instructor asserted some superior knowledge about psychology and human behaviour. If you had combined the economics study with studies in psychology and sociology, you would have soon realised that what was being taught in your economics course was total nonsense. There was an article in the Fairfax press recently (August 6, 2017) – Crisis in high school economics a threat to national wellbeing – ruing the declining enrolments in secondary school economics programs. The point is that these courses are typically more damaging than useful and the contention of the journalist that we are reducing the quality of the economic debate as a result of less people studying economics is problematic. The typical economics program is simple indoctrination into a set of neoliberal principles that allow poor policy to continue despite it delivering disastrous outcomes. There is a crying need for more economic and financial literacy, but that requires an entirely different approach to be adopted rather than jamming more kids into the existing courses and having them come out dangerously brain dead.

The journalist poses the question:

Are we losing our ability, as a nation, to have the great economic debates?

She reports on a recent speech by a senior RBA (central bank) official who:

… painted a truly troubling picture of the state of economic literacy of young Australians today.

This is allegedly because:

Since 1992, the number of year 12 students taking economics has declined by almost 70 per cent, from 40,000 to closer to 10,000.

Students have been lured into “business studies” subjects because they think they will be “more employable”.

The decline in enrolments is also skewed. Less women are studying economics and there is a skew “in economics enrolments towards higher socio-economic schools”. So the kids from the top-end-of-town families are still being versed, according to the journalist “in the powerful language of economics”.

She thinks this is “troubling indeed”.

One might expect, that as a professor of economics, I would be similarly troubled.

I am and I am not.

First, I am worried because of the rising importance of so-called ‘business studies’ masquerading as education. My experience of working in university faculties where this curriculum has also taken over tells me that there is very little educational value in studying these subjects (marketing, HRM, et cetera).

Students who finish these ‘business studies’ degrees are qualified to erect marketing displays in supermarkets, while they are induced into these courses with a promise of managerial positions. The latter get taken up by mathematics and engineering graduates who have nowhere to go in their own discipline fields by way of employment.

So in that sense, the shift that the journalist documents is indeed troubling.

Second, I’m not worried that students are no longer studying economics at high school given the poverty of the curriculum that is offered.

Given the dominance of the mainstream, neo-liberal way of thinking in economics and the way in which this erroneous framework permeates the teaching of the subject in both secondary schools and universities, I suspect the students are better off without the propaganda.

One can hardly say that studying economics in most schools prepares the student to develop a sound understanding of the way the monetary system operates and the policy choices available to a currency-issuing government.

Students from a young age are indoctrinated with a series of myths about these matters if they study economics formally. It is more about training them to be compliant operatives in the neoliberal system rather than educating them to be well read.

Third, to skew towards children from well-off families in private schools continuing to study economics just tells me that the old networks the channel these children into decision-making positions, which perpetuate the existing neoliberal frame, is alive and well and won’t change any time soon.

When you first start to study economics, particularly at universities, you are forced to rote learn and accept a very curious set of assumptions about human behaviour.

You are also urged to accept, rather berated to accept, that economics is a ‘value-free’ area of study. That is, the principles that are espoused are allegedly, independent of human values. You are told there is a clear-cut difference between so-called objectivity (‘value-free’) and subjectivity, which is the messy world of emotions, values, morals and the like – ‘shoulds’ rather than ‘what is’.

It is of course a false distinction. Anything seen through a human lens, by definition, is tainted by our subjective beings.

To try to discourage us from seeing that, and to make it look as though economics is a ‘scientific’ discipline along the lines of the physical sciences, students are told that the goal of individuals, who are assumed to be infinitely rational, is to always maximise utility or, self-interest.

By acting in this fiercely independent fashion, the pursuit of our own greed, produces the best outcomes for everyone. Once we deviate from the maximisation of our own greed, or, more to the point, are prevented from doing so by government regulation, then everybody suffers diminished outcomes.

Moreover, individuals make these rational, maximising decisions on the basis of full and relevant information, which extends from today to infinity. Indeed, many economics papers will assume the choices are made by an ‘infinitely-lived’ agent (individual).

For example, in graduate studies students will be introduced to so-called transversality conditions, which dominate decision-making over the course of one’s lifetime (so-called intertemporal optimisation).

In the Palgrave Dictionary of Economics we read:

The transversality condition for an infinite horizon dynamic optimization problem is the boundary condition determining a solution to the problem’s first-order conditions together with the initial condition. The transversality condition requires the present value of the state variables to converge to zero as the planning horizon recedes towards infinity. The first-order and transversality conditions are sufficient to identify an optimum in a concave optimization problem. Given an optimal path, the necessity of the transversality condition reflects the impossibility of finding an alternative feasible path for which each state variable deviates from the optimum at each time and increases discounted utility.

Got it! Probably not!

In English, individuals have to choose between competing ends over their lifetime and will always choose the best (optimal) outcome given they know what the future holds.

An often-used example in graduate programs relates the decision of an ‘infinitely-lived’ individual to loan their savings to governments to ‘fund’ deficit spending.

What will determine their decision?

Apparently, they have to make up their mind based on the assumption that out in infinitely the debt issued today will be fully paid off by running primary fiscal surpluses in the future (discounted by the appropriate (optimising) factor that takes into account the time impact on a dollar today).

The relevant transversality condition ensures that the present value (that is, in today’s dollars) of the government debt over some infinite time horizon is exactly equal to the present value of all future fiscal primary surpluses that will be required to pay off the debt (also over the infinite time horizon).

These conditions are built into Dynamic Stochastic General Equilibrium (DSGE) models that still dominate policy making (central banks, treasuries etc) and academic research.

Even mainstreamers like Willem Buiter described DSGE modelling as “The unfortunate uselessness of most ‘state of the art’ academic monetary economics”. He noted that:

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution … and the New Keynesian theorizing … have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck … the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling … excludes everything relevant to the pursuit of financial stability.

I am sorry if you don’t follow it. Most students don’t. They just rote learn it to pass exams but, importantly, pick up the subjective message of the exercise:

– that fiscal deficits have to be paid back via higher taxes or lower government spending in the future and that imposes costs on all of us.

– that is, fiscal deficits are bad and should be avoided.

This is tied in with notions that as individuals (either as household decision makers or in our capacity as decision makers within business firms) we engage in behaviour that offsets any fiscal interventions that the government impose on us.

The best known example of this nonsense in the mainstream narrative is the so-called Ricardian Equivalence which builds on the so-called Rational Expectations concept in economics.

I considered these issues in this blog – The myth of rational expectations

The Rational Expectations (RATEX) literature, which evolved in the late 1970s, claimed that government policy attempts to stimulate aggregate demand would be ineffective in real terms but highly inflationary.

People (you and me) anticipate everything the central bank or the fiscal authority is going to do and render it neutral in real terms (that is, policy changes do not have any real effects).

So attempts by government to expand the economy and reduce unemployment via increases in the discretionary component of the fiscal deficit will lead to accelerating inflation because agents predict this as an outcome of the policy and build it into their own contracts.

In other words, they cannot increase real output with monetary stimulus but always cause inflation.

RATEX theory claims that individuals (you and me) essentially know the true economic model that is driving economic outcomes and make accurate predictions of these outcomes with white noise (random) errors only. The expected value of the errors is zero so on average the prediction is accurate.

Everyone is assumed to act in this way and have this capacity.

For example, if the government announces it will be expanding the deficit and adding new high powered money, we will also assume immediately that it will be inflationary and will not alter our real demands or supply (so real outcomes remain fixed). Our response will be to simply increase the value of all nominal contracts and thus generate the inflation we predict via our expectations.

Ricardian Equivalence goes one step further. It assumes that we know the government has to pay back any deficit with higher taxes in the future – and we know the quantum that will be involved. As a result, we reduce our consumption spending (increase our saving) so as to exactly create a sum in present value terms that is exactly equal to the present value of all future deficits.

So government net spending increases as our spending declines – no change in spending. Less extreme versions of the theory maintain that the non-government offsets might be partial. Some say, the offsets overshoot – so the economy goes backwards if governments increase their spending.

The whole idea that the IMF and others paraded during the GFC of a ‘fiscal contraction expansion’ was predicated on the offsets being greater than 1. In other words, if government engaged in ‘growth-friendly’ austerity (cutting their net spending) then the non-government sector would increase its spending by more than the cuts in public spending and, as a result, total spending would rise and economies would resume growth.

We know from experience that none of that happened.

Researchers who have examined the underlying behavioural assumptions upon which the mainstream theories rely have found that humans are not at all like the way they are assumed to be.

Human decision-making is fraught, driven by emotion, irrationalities, comparison effects (with others) and more.

For example, in one famous 1981 study – The Framing of Decisions and the Psychology of Choice – by psychologists Amos Tversky and Daniel Kahneman showed how framing – how the choice is presented to us – is instrumental in influencing our ultimate decision.

This is, of course, the foundation of advertising, which economists claim is just providing information rather than manipulation.

The famous Tversky-Kahneman experiment offered the following choice to a group of individuals:

Problem 1 [N = 152]: Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the con- sequences of the programs are as follows:

If Program A is adopted, 200 people will be saved. [72 percent]

If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. [28 percent]

Which of the two programs would you favor?

The N = 152 indicates the sample size and the other numbers in square brackets were the response proportions which lead to the conclusion that “the majority choice … is risk averse”.

That is, “the prospect o f certainly saving 200 lives is more attractive than a risky prospect of equal expected value, that is, a one-in-three chance of saving 600 lives”.

Then, 155 respondents were posed the following problem:

Problem 2 [N = 155]:

If Program C is adopted 400 people will die. [22 percent]

If Program D is adopted there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die. [78 percent]

Which of the two programs would you favor?

So, now the majority choice indicated “risk taking: the certain death of 400 people is less acceptable than the two-in- three chance that 600 will die”.

Yet, “the two problems are effectively identical”.

Rational decision making would not succumb to this switch in choice as the frame changes.

[Reference: Tversky, A. and Kahneman, D. (1981) ‘The Framing of Decisions and the Psychology of Choice’, Science, 211(4481), 453-458.]

Moreover, the 2015 National Financial Capability Study conducted by the US institution FINRA, is very telling.

It was reported on in this Fortune article (July 12, 2016) – Nearly Two-Thirds of Americans Can’t Pass a Basic Test of Financial Literacy.

The 2015 survey shows that Americans are incapable of performing even the simplest computations that would be required to engage in optimal choice exercises of the type assumed to govern decision-making in the mainstream economic theory.

27,564 Americans revealed an incredible state of ignorance of key financial concepts and variables.

For example, “Nearly two thirds of Americans can’t calculate interest payments correctly” – that is, cannot compute a simple percentage.

Try solving out the transversality condition with that level of skill!

The Survey found, for example:

1. “When budgeting household finances, many Americans focus on relatively short-term time periods.” The majority have a time span of a few years only.

2. When asked five basic questions about interest rates, inflation, bond prices, mortgages and risk, “only 14% of respondents are able to answer all five questions correctly”.

3. And “financial literacy shows a slight downward trend since 2009”.

4. “While speculative, the trends in financial literacy scores suggest a shrinking class of moderately financially literate citizens, just as growing income inequality has led to a shrinking middle class.”

5. On interest rate compounding (an essential concept if one is to understand present value), “only a third of respondents are able to answer the question correctly … many Americans simply do not understand the potential power of compounding.”

6. And despite the sharp rise in fiscal deficits, the Survey concluded that “there is not much evidence to suggest that more Americans are saving for the long term.” So how will the deficits be paid back? (joke, laugh now).

Conclusion

Of course, even if the level of literacy was higher, the sort of decision-making framework claimed to determine individual choices is still pie-in-the-sky sort of stuff.

But it serves its purpose as an ideological construct creating a narrative that is anti-government and allows policy to maintain mass unemployment and diminished well-being.

Crowdfunding Request – Economics for a progressive agenda

18 days left, still only raised 41 per cent of target.

I received a request to promote this Crowdfunding effort. I note that I will receive a portion of the funds raised in the form of reimbursement of some travel expenses. I have waived my usual speaking fees and some other expenses to help this group out.

The Crowdfunding Site is for an – Economics for a progressive agenda.

As the site notes:

Professor Bill Mitchell, a leading proponent of Modern Monetary Theory, has agreed to be our speaker at a fringe meeting to be held during Labour Conference Week in Brighton in September 2017.

The meeting is being organised independently by a small group of Labour members whose goal is to start a conversation about reframing our understanding of economics to match a progressive political agenda. Our funds are limited and so we are seeking to raise money to cover the travel and other costs associated with the event. Your donations and support would be really appreciated.

For those interested in joining us the meeting will be held on Monday 25th September between 2 and 5pm and the venue is The Brighthelm Centre, North Road, Brighton, BN1 1YD. All are welcome and you don’t have to be a member of the Labour party to attend.

It will be great to see as many people in Brighton as possible.

Please give generously to ensure the organisers are not out of pocket.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.