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Rewriting the Book

"Arguing in My Spare Time," No. 3.16

by Arnold Kling

JUne 14, 2000

The economics profession does not move in Internet time. Academic economists still seem to be wrestling with many of the same issues that occupied them when I was in graduate school. If the high-level debates change only slowly, the introductory course moves glacially.

Recently, David Romer wrote an article in the Journal of Economic Perspectives about how to teach Keynesian economics without the LM curve. I am sure he meant this as a very revolutionary suggestion, given the snail's pace at which economic textbooks change.

However, in my opinion, the freshman economics course should be changed much more radically. I would suggest doing away with macroeconomics almost entirely, and replacing it with other selected topics.

Alan Blinder, who wrote "Hard Heads, Soft Hearts," highlighted what he called "Murphy's Law of Economics," which states that the more economists know about a subject the less they are consulted. For example, there is a consensus in the profession about the adverse effects of rent control, yet we rarely are asked about it. On the other hand, economists often are asked to predict interest rates, which they are unlikely to be able to do successfully.

Consider macroeconomics in the context of Blinder's taxonomy. Does it represent a solid body of analytical consensus, or a speculative area of unresolved debate?

In putting a whole semester of macroeconomics into the freshman course, the profession is leading with its chin. We are not at all sure about our models of economic fluctuations. Moreover, today's college freshmen may not be terribly interested in the causes of inflation and unemployment, given that they have grown up in an era where neither was a major problem.

Instead, here are some ideas for selected topics in a second semester of introductory economics.

  1. The stock market and modern finance theory

    Individuals are very interested in the stock market. Economists have a consensus view that passive indexing is better than active trading. We have a lot of theory and evidence to support this view. Freshmen should be exposed to this.

  2. Statistical Modeling and Risk Management

    Most college students are offered credit cards. There is a lot of fascinating economic analysis involved in understanding credit cards. For example, the use of "frequent flyer miles" and other forms of pseudo-currency is rather interesting.

    Credit scoring is the use of statistical models to predict how consumers will behave with credit cards, mortgages, and other things. I recall reading a few years ago that credit scores were predictive of automobile insurance claims, so that one of the major companies was using them to influence rates. Economists understand these statistical models and should explain to students how they work.

    The credit card industry was doing "data mining" and "mass customization" before futurists made careers out of predicting these phenomena. It provides an excellent case study in risk management, statistical analysis, and the economic uses of information.

  3. History and growth.

    The idea of this section of the course is to enable the student to understand how the economic problem has evolved in recent centuries. I think it would be good for students to know that only in the past 125 years or so has it been possible to feed a large country without having the majority of its work force on the farm. I also believe that it would be useful to help students to think about the difference between growth that is driven by capital and growth that is driven by innovation.

  4. Intergenerational transfers.

    One can argue that the largest impact of the government on private individuals is in the form of intergenerational transfers, especially Social Security and Medicare. If a goal of an economics course is to educate the population about public policy, then these topics are important.

  5. Information economics.

    Should someone leave introductory economics without understanding anything about the differences between information goods and other goods? Without any background in the theory of network effects? I don't think so.

    Macroeconomics still matters. However, it seems reasonably clear that its relative value has declined in the thirty years since I first took freshman macro. Rather than tinkering with how to teach it, perhaps we ought to be looking for topics that can be substituted which have a greater marginal return.