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How Should We Teach Economics?

Mises Daily: Tuesday, January 18, 2005 by

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I write this after preparing and grading final exams for the fall semester of 2004 here at Frostburg State University, my employer. The tests for my microeconomic principles classes are finished, grades are in my spreadsheet, and I already am beginning to prepare for my classes next semester.

Yet, even though I have gone through all the proper motions of teaching economics—and students through the evaluation process have said they generally liked the class—it strikes me that there is a much larger problem out there for people who teach economics: we really don't teach it very well.

Now, I am hardly the first person to point out this problem. The late Paul Heyne, who was one of the truly great teachers of undergraduate economics and devoted himself to that craft, once wrote that a course in economics is easy to teach—but not to take. Indeed, there exists a proliferation of textbooks and online sites with all of the 1-2-3 tools for presenting economics to students in a clear, simple fashion.

So, a reader might ask, just what is my problem? All of the material for teaching economics is easily obtained, from overheads, PowerPoint presentations, and videos, everything to appeal to students in this visual age. But that is not what bothers me, although I must say that the easy access to these things actually may be part of the problem, not a solution. No, what bothers me is that through all of this, we are not teaching economics. Call it applied arithmetic, call it applied geometry, applied calculus, whatever, but please do not call it economics.

When I was teaching principles classes while in graduate school, student teachers were instructed to instruct according to the following chain of courses: teach principles in a way to prepare students for their intermediate courses, which were to be taught in a manner to prepare students for graduate classes, which were taught to prepare students to write for journals read by other economists. I further suspect that this particular chain-of-teaching is common in any program that grants doctorates, or even masters degrees. The obvious problem, of course, is that it doesn't tell us anything about teaching economics.

As an undergraduate taking economics, I also was a student-athlete (or, at least an athlete and somewhat part-time student) who was more interested in the upcoming competitions than actually learning economics. I can say honestly that I can recall learning nothing that I remember, academically speaking, in any of my economics classes. This is due more to the student than the teachers, but, nonetheless, I also will say that I do remember the content of other classes I took that year. To put it another way, I was not an absolute academic slug, just a partial one, at least when it came to learning economics.

Seven years after taking those courses, I began to read about economics through a publication called The Freeman, sent to me by William H. Peterson, who then lived in my home city of Chattanooga. The more I read The Freeman and other materials from the Foundation for Economic Education, including Henry Hazlitt's classic Economics in One Lesson,the more I came to understand—and become passionate about—economic analysis.

One thing led to another and then to another, and I found myself in graduate school working toward a masters degree in economics. Fifteen years after completing my masters (1984), I would defend my doctoral dissertation at Auburn University, and then entered into the "business" of teaching economics full-time, first at a small college in South Carolina, and then to my present place of employment.

What has struck me as interesting, however, was the disconnection between what I learned reading The Freeman and Economics in One Lesson and what I learned in graduate school. Both use the language of economics, yet the differences are stark. For one, Economics in One Lesson can be read by anyone who can perform elementary logical exercises in his mind. It is simple, but not (as many critics might claim) simplistic. But the main thing about this book, and others like it, is its dependence upon logic and intuition. Once one has established basic and workable concepts in his framework of thinking, then the rest of the story follows logically.

My "formal" studies of economics were much different. In my classes, I was expected not only to master the logical framework under which the courses were taught, but also to learn the mathematical concepts that accompanied our analysis. For example, the most important unit of measurement in economic thinking is the marginal or last unit. The first time I read anything on that subject that made sense was in a Freeman article by Hazlitt. Thus, when I started my graduate school sojourn, I already was familiar with marginal thinking.

However, to learn and apply marginal thinking in graduate school requires more than a mental ability to understand the logical points made by Carl Menger in his 1871 path-breaking Principles of Economics; it requires the knowledge (and ability to apply) differential calculus. In fact, as I would find out time and again, a mastery of mathematical concepts was essential simply for getting by, not to mention actually learning (or relearning, to be more precise) the material that we called economics.

I survived that formal study of economics known as graduate school, but I cannot say I really comprehended what I supposedly was learning until I began to attend a seminar in which we discussed another book on economics called Man, Economy, and Stateby Murray N. Rothbard.

Now, by this time, I already was a Mises Fellow at the Ludwig von Mises Institute and since my early days in economic thinking either had been an all-out Austrian or at least a fellow traveler. Being in my third year of grad school, having passed my comprehensive and field exams, I began to be exposed to a way of thinking that I thought that I knew, but, in reality, did not understand at all.

Perhaps it is ironic that a book that was written as a foil to what we call "mainstream" economics enabled me to understand mainstream thinking for the first time. In fact, the book enabled me to take in many of the things my professors were trying to tell me, but that (apparently) I had lost in the translation. Moreover, I began to wonder if my own professors understood the logical implications of what they were teaching.

For example, all of the Neomarshallian models that we used to examine the various categories of "competition" are seriously flawed because they require that all of the market participants that are reflected in the exchanges that are pictured both are privy to all of the relevant information and act correctly on it. Yet, an internal contradiction exists here; all of the models assume both scarcity and perfect information, which simply cannot be true simultaneously.

Mainstream economists, when faced with this knotty problem, reply that there is nothing wrong with using models with unrealistic assumptions—as long as the models accurately predict events. That is all well and good, I suppose, but in truth the models don't predict things as well as economists say they do, nor do they describe events accurately (and in real time).

For example, according to the models, the presence of what we call large economies of scale actually constitutes a market failure. In the vernacular, it means that economists supposedly believe that the automobile industry suffers from market failure because automobiles are made in capital-intensive, large-scale operations instead of in hundreds of tiny, garage-sized factories where people put cars together by hand.

Those who might think my contention to be illogical do not comprehend the logical extensions of mainstream economic theory. The market works only when it is populated by numerous small firms that neither can affect overall market outcomes by their own actions nor make an economic profit. For all of the protestations of many mainstream economists that this form of analysis is used only to simulate market activities and not to pronounce judgment upon an acceptable state of economic activities, such a characterization of what economists call the state of "perfect competition" is, indeed, a value judgment. The terms "perfect competition" or "market failure" are not value-free; they are laden with implications.

For example, the natural implication of the presence of a market failure is for government intervention to "correct" it, since there exists a built-in assumption that government "knows" the solution. Anyone who thinks that such a state of analysis does not invite government intervention has never read a paper on antitrust law or witnessed an antitrust case. (Or that person has not read a typical economics textbook.)

If the "market failure" paradigm fails the simple test of economic logic, so does nearly everything taught in what we call "macroeconomics." In fact, in order to properly comprehend what we in the profession call "macro," one must dispose of nearly all economic logic and embrace the gospel of "aggregate demand," which is one of the worst doctrines in all of modern academic economics. (That people who have earned doctorates in economics refer to "aggregate demand" as though it were something real tells me more about the course of formal study in economics than it does about the concept of AD itself.)

Thus, in the end, I am back to where I began. In the formal teaching of economics, we are expected to present the mainstream views, which students barely understand or are able to grasp the simple geometry without grasping the larger and more important logical principles. Yet, without the economic logic that is the basis for the analysis found in Austrian Economics, what we are doing is nothing more than applied math or geometry.

In answering my own question, I have found that if one holds to the Austrian views, teaching economics is both easier and more difficult. They are easier because the Austrian concepts are so logical that students are able to quickly absorb them. Yet, they also are more difficult because to successfully explain them means that one either has to teach around the mainstream concepts or tear them down altogether after one has presented the material.

In the end, Austrians have the greater teaching burden than do mainstream instructors, but it still is possible to teach economics correctly. It is just that we have more work to do.

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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive. Comment on the blog.