Economics as the study of human action

Economics is not only about predicting GDP and prices. In fact, economic models, as we have seen with the recent financial crisis, often fail to do a good job at describing the real world. That does not mean that we have to discard economics. On the other hand, economics is a powerful tool for understanding human behavior and can be useful in providing a unique perspective about many social issues. In addition, economic ideas influence the social, political, and economic institutions of our society, which in turn affect the choices that we make every day. As John Maynard Keynes wisely observes:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

This makes studying economics even more important. But it makes recognizing the limitations of the discipline equally needed. It is also necessary to remember that economics is closely related to the rest of the social sciences. In fact, economics evolved from the field of moral philosophy, and its roots go back to the works of Marx, Bentham, and even Plato. Unfortunately, textbooks in economics dedicate very little time to the historical and philosophical aspect of the discipline, which contradicts one of the goals of liberal arts education—that we must study our history if we don’t want to repeat it. It is not surprising that most of my senior economics students don’t know the names of Adam Smith, John Stuart Mill, Alfred Marshall, Friedrich Hayek, and even Maynard Keynes and Milton Friedman.

To give my students a different perspective about the subject (from that in most textbooks), and to show them how interrelated economics is to the rest of the social sciences, I offer additional readings from the fields of psychology, philosophy, sociology, and history. For example, in my principles courses, I require students to read Robert Heilbroner’s book The Worldly Philosophers, which enables them to see the evolution of economic ideas and introduces them to some of the leading thinkers that have shaped economic thought (and I would argue, helps them understand much better what they are currently learning).

The neoclassical bias

In addition, textbook economics is heavily biased towards neoclassical economics. Limiting the flow of information to only one theory, however, contradicts another goal of sound education—to challenge students to think critically about what they learn and to promote freedom of thought. Many of the additional resources (readings, videos, demonstrations, etc…) introduce my students to different schools of economic thought — Post-Keynesian, Institutional, Evolutionary, Austrian, or Marxist economics. Even if the ideas of these schools are wrong, there is still great value in studying them. Indeed, this approach teaches students to think for themselves; to learn how to think, rather than accept blindly and mechanically the theory in the book.

For example, I assign as an extra credit assignment J. Wolff’s book “Why Read Marx Today?” which is a great introduction to Marx’s writings and ideas.

The apple-banana bias

Economic textbooks are full of apple-banana examples. While such examples are useful in simplifying complex mathematical models and understanding some concepts (and I use them all the time), they are not realistic and leave students with the impression that what is being taught is not relevant. On the contrary, my approach is to present students with a wide range of social issues and to build my lectures around them. Students find this approach much more interesting, intuitive, and relevant. As a result they participate more actively in lectures and learn more. A great book that helps students think how economic principles can be applied to real life (and to some of the most controversial debates of our times) is Economics of Public Issues by R. Miller, D. Benjamin & Douglass, and C. North. Another great resource that provoke students to think about different current issues is the Economist Debates [visit here].

The century old bias

Finally, much of economic theory in the textbook is at least a century old. Recent developments in the fields of experimental and behavior economics provide useful insights into human behavior. However, they undermine some of the foundations of standard economic theory, and are therefore omitted from textbooks. Nevertheless, presenting students with these alternative models demonstrates the limitation of the  orthodox theory, and helps them gain better understanding of what they are learning. This is why after teaching the standard consumer choice theory, I dedicate one lecture to challenging the assumptions of the theory and presenting an alternative model, e.g. Prospect Theory, something that is not common in other principles of microeconomics classes. For example, a great book that challenges students to think more critically is The Paradox of Choice by Barry Schwartz. (His TED presentation is on the right).