Monday, August 11, 2008

Critical Reading of Economics

I've run across an interesting piece that is worth sharing with you. Whether it's worth sharing with your students, I'll leave to your judgment. You're the one in your classroom.

Let me start by saying the source of the article, City Journal, is the product of a conservative think-tank. Consequently, it has a very definite slant. I haven't read City Journal before today, but the article has some uses in the classroom in terms of teaching students to be critical thinkers.

Economics Does Not Lie is an interesting title for an article, whatever you might think about the subject and its application. My main interest in the article (HT to Arts & Letters Daily) was the list of 10 propositions in economics it contains. It is fascinating to see what others feel are the important "truths" in any field. This blog has visited the topic before, and the article gave one more view. I won't bother you by listing the propositions, you can read them yourselves, but I will make a couple comments and then a suggestion for use with your students.

Early in the article, the author, Guy Sorman, speaks about "precise (though not infallible) mathematical models." While I'm sure he said what he meant, my feeling is that many would argue whether the models would be more helpful if they were accurate, as opposed to being precise. There's little value in being precisely wrong. (In fact there's an old joke about decimals being invented so economists demonstrate their sense of humor.)

In the first proposition, he also states that the market economy is the most efficient of all economic systems. While true, I think many people become more concerned with equity than efficiency. Of course, the fact that there are multiple definitions of equity may be part of the issue.

Research in decision-making plays an important part in the explanation of the third statement. Sorman refers to recent research that indicates our short-term choices are made in a different part of the brain than long-term choices. He also points out that short-run decisions are often the most prone to mistakes. Given the tendency for many non-economists to fall back on Keynes' statement about our condition in the long-run when discussing economic policy, I find this interesting.

The seventh statement deals with labor costs and unemployment. It does not mention technology. But labor costs are related to technology through productivity. It is the ability of labor to access and use technology that makes labor more productive. On the one hand technology can reduce costs, but it often comes with higher wages for more skilled workers.

The ninth statement addresses complex financial markets and economic progress. This is risky given the current environment. Yet, I think it is a valid and important point. If U.S. financial markets were concentrated and isolated, without the ability to spread risk, I suspect the current slowdown could have been much worse. Now, that doesn't make those institutions and individuals from other countries happy that they got stuck holding questionable securities. But again, take the cost and concentrate it, and the U.S. economic picture looks worse yet. And with other nations trade so dependent on the U.S., a worse slowdown here could still have international repurcussions.

So how is this used to promote critical thinking? Let me first direct you to two definitions from The Economist. Positive economics is based on what is. Normative economics is based on what we would like to see. I think an article like this would be great to have your students read, looking for positive vs. normative statements. I think research would support many (not all) of the propositions as positive. I think the support of these statements frequently depends on normative statements. This exercise can be very relevant in a period where we are asked to make choices that can affect our economic future.

What are your thoughts?

1 comment:

rdan said...

Tim,

I would like to re-post this critical reading on Angry Bear, with the caveat about the intended level of discussion.

Economics has become so politicized in the media I would like to see how a different audience might respond as well to YOUR post...I might have stronger views on some of the points than you, and certainly at the teacher level needs sorting.