I start every semester of Economics with the statement that the students have been totally shafted by not being taught the most basic theory in their twelve years of education; every choice has a consequence. That’s why the subject has been given the name “the dismal science”. People don’t like the idea that they control their own destiny a lot more than they are told, or that they are responsible for their own actions. However the idea of choice is rarely what’s discussed when Economics takes the stage. Occupy, the Great Recession, income inequality; all of it becomes politicized to the point that we forget that people make choices and choices have consequences.
I’ll admit that I hate the mathematical arena of Economics. The formulas and theorems are the reason I totally avoided the subject in college and instead dealt in the realm of History. But the results are what got me attracted to the subject in my later years of post-secondary education. When you looked at historical analysis from an economic perspective the puzzle pieces fall into place much more easily. Problems become understood, solutions (most half-hearted) present themselves as mere political devices, and the realm of politics makes even more sense. The same applies to Modern History, the subject of a New York Times debate that asks if we should be teaching Economics differently out of the Great Recession.
“The financial crisis offered a golden opportunity for university economists to question the utility of supposedly scientific models that failed to predict an economic earthquake.”
Mona Chalabi makes that statement from the NYT forum and takes the position that many have stated since this financial meltdown began; why didn’t economists predict this? The answer is that many economist did predict the oncoming doom but few were willing to really listen. I remember going to a Federal Reserve workshop in early 2007 were an economist blared warnings about problems within the banking system. And I don’t know if people remember Alan Greenspan’s “irrational exuberance” but the term was stated many times during the post-9/11 run up that was created by an irrational influx of demand on credit. The rest of the articles are insisting that things need to be changed in how we teach monetary policy in regards to economics because the “old ways” of free market capitalism have failed to save the world from the perils of selfishness.
There are two things wrong with the collection of articles.
First is the idea that this economic downturn was entirely economic and not political. With all due deference to Ron Paul and his mission to turn the Federal Reserve into a Depression pariah, more of this Recession is due to fiscal policy that a) ignores economic reasoning, and b) refuses to find reasonable middle ground. We can go around and around about taxes and cuts until Jamie Moyer pitches a perfect game and it still won’t fix the problem of safety nets that are too big, tax rates that are too small, and a tax code that is too corrupt.
Second is the realization that people caused this recession because they are constantly not being held responsible for choices they make. Corporations made bad decisions. Individuals made bad decisions. And yet the markets never get a chance reach an equilibrium when people constantly step in and bail out losers. And no, and I’m an advocate of a completely free market that allows losers to die. Neither, by-the-way, are most economists. However right now there are plenty of people that have more incentive to stop paying their mortgage because it will get them a better rate. Um, how does that work? How is it that I pay my house payment on time, every month, yet the reward goes to the person that misses payments? That’s one hell of a perverse incentive.
The first thing we need to do about teaching Economics is reinforce the idea that Economics is about choice and consequences. We can teach basic Economics students about Quantitative Easing and Reserve Currency and the entertainment that is European Banking until we are blue in the face, and nothing will change because we constantly miss the point; you can’t always get what you want.