What is Wrong with the Way we Teach Economics?

Jun 12, 2014 by

An Interview with Professor John Komlos: What is Wrong with the Way we Teach Economics?

Michael F. Shaughnessy –

1) Professor, could you start by telling us a bit about yourself, your education and experience?

Here are the basic facts: PhD economics, University of Chicago. I’ve retired after teaching at the University of Munich, Germany for 18 yrs.

I created a new field within economics: “Economics and Human Biology” with the journal of the same name. Gained world-wide recognition for discovering the Americans are no longer the tallest in the world. See: Paul Krugman on my work in the New York Times “America comes up short”: http://select.nytimes.com/2007/06/15/opinion/15krugman.html?scp=1&sq=Krugman%20June%2015%202007&st=csehttp://select.nytimes.com/2007/06/15/opinion/15krugman.html?scp=1&sq=Krugman%20June%2015%202007&st=cse

2)  Now, what is wrong with the way economics is currently being taught?

It is too theoretical. I call it “blackboard economics” after the Nobel-Prize winning economist Ronald Coase. It is based on an imaginary market that functions frictionlessly as though it descended straight from heaven and they keep muted all the problems that can go wrong with markets. This is very odd after the greatest market failure in the history of mankind. But teachers of economics are insensitive to evidence contradicting their teaching.

They spend most of their time teaching the perfectly competitive model in which there are many sellers and many buyers. But this model has negligible importance in today’s economy because practically nothing that we buy comes from such a market. They assume that people are rational and they are not willing to give that assumption up although we’ve just had a major demonstration of how irrational people can behave in the market place. Mainstream economics is therefore pre-Freudian and pre-Pavlovian.

In addition, it fails to incorporate real-world phenomenon such as imperfect information and the high cost of acquiring information. It fails to consider that babies are born with different chances in life and will go to schools of different quality. It is not their virtue or fault that they were born in different circumstances and yet the market will reward them very differently.

There are too many factors to mention in a short response. I talk about this in my recent book: http://johnkomlos.com/

3) I recall using Paul Samuelson’s book back when I was in college- What are your gripes about his book–too theoretical?

Please see the issues I raised above. Yes, it is too abstract. It is not real-world economics. It pertains to homo-oeconomicus which is not realistic at all. It does not consider how much firms manipulate our wants. It does not consider the obscene distribution of income nor  does it consider conspicuous consumption and the importance of relative incomes. It does not consider the impact of big firms on government called regulatory capture. It does not consider the role of power in setting wages and prices. John K. Galbraith stressed the need for countervailing power to offset the power of big corporations but such concepts are absent in his book in order to make markets seem to function smoothly and efficiently. He considers taxes to be inefficient but how are we going to finance schools w/o taxes? I could go on and on.

4)    Now, SOME colleges and universities offer a MICRO economics class and then a MACRO economics class – is this a good approach?

The division into two segments is not a problem. The problem is that there is an inconsistency between the two. Macro has unemployment while micro does not, for instance. Micro assumes rational people while macro as money-illusion and “animal spirits”. Micro does not allow redistribution because people’s utility is not comparable while macro assumes that you can calculate the net benefit of a policy by comparing the income of winners and losers. Rather strange.

5) Now let’s talk real world—the economy is moving along- and then some war breaks out in some part of the world–particularly in some oil rich reason—how does that impact the economy- and does anyone out there talk about these kinds of things?

Incredible costs. Stiglitz wrote about this: The Three Trillion Dollar War: The True Cost of the Iraq Conflict. All this takes away from investments at home.

6) Now let’s talk stupidity.  A few years back homes were being sold to people with no money in the bank and no down payment—stupidity or idiocy or political skullduggery?

All of the above including fraud and predatory lending. Of course, Greenspan’s ideology is the ultimate problem. He believed firmly that markets can take care of themselves and that is nonsense. Yet, we keep on teaching that to millions of students a year.

7) A follow up question- I know that to buy a home in Europe – the person has to have a SUBSTANTIAL amount of money as a down payment and a good deal of collateral. Why does this not happen in the USA.?

Greed

8) I have actually taken my social studies classes to the Federal Reserve in New York City, back when I taught in the South Bronx.  Do those people have a real good reality handle on things? Or are they just pie in the sky theorists?

After the greatest meltdown of markets in the history of mankind, one can only conclude that they are not well trained. How can they be? They come for programs that teach mainstream economics. So you have a thousand Ph.D.’s before the crisis using the wrong models! They forgot about systemic risk… slight oversight.

9) Here is where I try to apply simple economics to the U.S. government. I have a check book. I have 1000 dollars in it. If I write checks for $1200.00 and they all hit the bank the same day- I am in REAL trouble. How does this relate to the Federal government and our 17 or more trillion dollar debt?

The government can print money and you can’t. Plus the dollar is a reserve currency. So the federal government can issue a bond and the Chinese will want it because they want to save and it is a safe investment. So, we can expand our debt without a problem.   You can’t.

The Chinese do not want to hold your check. Plus the fed is trying to rev inflation up to 2%. This helps the government because that means that the real value of the debt decreases by 2% every year. This means that in 35 years the real value of the debt is halved.

10) Economics and a state budget—-these people often ANTICIPATE revenue and income that may not be forthcoming. Who monitors these morons?  Or are they just free to theorize to their heart’s content?

I do not know the answer to this question.

11)  Competition is a fact of life—a small grocery store cannot compete in the short run or even the long run with the giants- Albertson’s , Wal Mart etc. Is this very simple premise taught in college economics courses?

Yes.

12) Let’s take a simple construct–the point of diminishing returns—should this simple idea ( that I often use ) be taught to business majors?

Sure

13) ” Generally acceptable accounting procedures ” is one of those loosey goosey terms that are thrown around- but I am pretty sure that Accounts Receivable is not an expense.  Can you discuss this?

Creative accounting and off-balance sheet accounting is a very big problem. It needs to be reformed but the government is unable to do so because of big business and lobbying and all that.

14) In the past, in order to stop strikes, unions got benefits which resulted in costs going up for the consumer. Yet for some unions, a strike is the only way to get things improved for workers.  Where is this taught in college ECON classes?

Unions are the boogeymen in Econ classes. They are supposed to increase unemployment, but in their heyday in the 1950s and 60s unemployment was low. This is what I say in my book. “The mantra of the free market led to the destruction of unions and with that a large segment of the lower-middle class. Thus, mega corporations were left with undue influence on the public interest, with sufficient money to bribe politicians to represent their interests instead of those of the public….

Economists are partly to blame, as argued in the film The Inside Job, because they advocated and disseminated the intellectual foundation of the view that regulation was superfluous, that markets left to themselves were efficient, and that the CEOs in charge were sophisticated, knew what they were doing, and hence deserved their bonuses.” I discuss this in more detail in Chapter 9 of my book.

15) The Stock Market—how much can it be trusted- is it a good investment? Or should one buy land or put money in the bank- these are some of the questions that college students may want answered- but are not. Is this the type of curriculum you are advocating?

No, I am not writing about investing. I am writing about how to understand the economy. How to understand our current predicament. For example that we are in a new economic regime in which underemployment still affects 20 million people and that the current economic system has no answers for these people. Half of the population is doing well but only by excluding a large segment of the population from the economic system.

16) What have I neglected to ask?

The future is not pleasant: Larry Summers has been talking about “secular stagnation” as far as the eye can see.

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